Two of the most important and fundamental concepts employers need to understand are salary vs. hourly and exempt vs. non-exempt employees. There are federal and state laws regarding each classification—meaning if you incorrectly classify a worker and do not pay them the proper wages or overtime they are legally entitled to, your business can receive some serious penalties!
Legal talk aside, you should also understand the difference in order to determine what employment structure is best for your company and for specific positions. There are several advantages and disadvantages to both hourly and salaried employment.
In this blog post, we’ll answer the following to ensure you know exactly how you should be compensating your employees:
- The difference between exempt vs. non-exempt employees
- The difference between salary vs. hourly employees
- Benefits and drawbacks of salary vs. hourly jobs
We’ll also address the federal regulations regarding minimum wage and overtime pay for good measure! Keep reading to learn more about these labor laws.
Exempt vs. Non-Exempt Employees
Simply put, an exempt employee is not entitled to overtime and/or minimum wage provisions set by the Fair Labor Standards Act (FLSA). It’s important to note that some positions may be excluded from both overtime and minimum wage, while other jobs may be excluded from one or the other.
Exempt employees are given a set annual salary and are expected to complete their job responsibilities regardless of how many hours it takes them. To qualify as exempt, an employee must earn a minimum salary of $684 per week or $35,568 per year. Exempt workers cannot be paid in hourly wages.
Hourly employees, as well as those who do not make the minimum salary noted above, usually must be classified as non-exempt. These employees are required to be paid the overtime. Overtime applies to any hours worked beyond 40 hours each week, and should be paid at a rate of one and a half times their hourly rate.
Non-exempt employees are typically also entitled to the federal minimum wage of $7.25 an hour. They can be paid a salary or hourly wage.
Check out this example for a better idea of what an exempt vs. non-exempt position might look like
Marketing manager Samantha is an exempt employee who has to present a big campaign to her company’s executive team. She stays late for a couple of nights to wrap up and rehearse her presentation. Her next paycheck will show the same amount, regardless of the extra hours she put in the week prior.
On the other hand we have non-exempt employee Tom, a customer service representative who chooses to pick up a few extra shifts and earn some overtime covering the phones. He’s not required to put in extra hours, but he knows that his next paycheck will include extra pay for the overtime he worked.
New Hampshire Labor Laws
For the most part, New Hampshire follows federal laws regarding minimum wage ($7.25 an hour) and overtime, which should be paid at time and a half to eligible workers.
Massachusetts Labor Laws
Massachusetts is also quite straightforward when it comes to exempt and non-exempt employee regulations. As of January 1, 2020, the Bay State has a minimum wage of $12.75 an hour and also requires that overtime be paid to non-exempt employees at time and a half.
Overtime rules and minimum wages vary by state, so check with your State Department of Labor to learn more.
Hourly vs. Salary
The difference may seem pretty straightforward, but employers need to know how these different classifications impact them and the way they need to pay their employees.
As the name implies, hourly workers are paid for the number of hours they work. A few common hourly jobs include retail store associates, administrative assistants, and lifeguards. These employees must be compensated at the state or federal minimum wage, whichever is higher.
Hourly employees might be paid weekly, biweekly, or even monthly. They are usually in charge of tracking their own time by clocking in and out on their company’s time-tracking system.
An employment contract cannot invalidate state, local, or federal laws. This means if a contract, for example, states that an hourly employee will not receive overtime pay past 40 hours in a workweek, the contract is not valid and will not hold up in court. A contract can, however, provide additional protections like vacation time, sick leave, and holiday pay.
A salaried employee receives a set minimum annual level of compensation, such as $50,000. Typical salaried positions include managerial roles and professional jobs like accountants and marketing professionals. These employees might also be paid weekly, biweekly, or monthly.
Salaried jobs often come with:
- A benefits package with health, dental, and vision
- A retirement matching plan (like a 401k or 401b account)
- Paid time off (including vacation and sick time)
- Short-term disability
Most employees on a salary are exempt, as long as they meet the minimum salary requirements noted earlier. A non-exempt salaried employee is a rare find. This means most salaried employees are not eligible for overtime.
Are you still wondering the best way to compensate individual employees at your company? Consider the benefits of salary vs. hourly pay.
Benefits of Salaried Employees
Salaried pay works best for employees who work a standard schedule because it allows you to:
- Budget your payroll a year in advance.
- Avoid calculating hours worked.
- Pay the same amount every pay period.
- Pay vacation and sick-time at a daily or weekly rate instead of an hourly rate.
- Compensate employees for the quality of their work rather than the time they put in.
Drawbacks Salaried Employees
When you employ salaried workers, you’ll have to:
- Ensure salaried employees are exempt via salary level, salary basis, and job duties test.
- Track salaried non-exempt employees’ hours and pay them overtime.
- Pay them the same even if they do not work a full workday or workweek.
Benefits of Hourly Employees
Hourly pay is particularly convenient and cost-effective for part-time employees and those with inconsistent schedules because you can:
- Pay employees only for the hours they worked.
- Match your payroll expenses to the workload or income-generating activities.
- Match labor costs to a certain type of job.
- Avoid the exempt employee classification process.
Drawbacks of Hourly Employees
With hourly employees, you’ll also have to:
- Track all the hours, breaks, and overtime worked.
- Pay time and a half for hours worked past 40 hours in a workweek.
As they grow, most companies end up with a combination of both salaried and hourly as well as exempt and non-exempt employees. Remember, hourly and salary refers to how an employee is paid; while exempt and non-exempt refers to the legal employment classification. Certain roles and responsibilities may determine which works best for your business or a certain position.
Still wondering how you should compensate your employees? BlueLion’s human resources experts will help you ensure you’re compliant with the FLSA while remaining as cost-effective as possible. Contact us today at 603-818-4131 or [email protected] to learn more about our services today!