When it’s time to expand your team to accommodate growing demand, managers are faced with determining whether to hire employees on an hourly or salaried basis. While there are pros and cons to each, as well as laws that dictate how certain positions must be classified, there are some distinct benefits to hiring employees on an hourly basis, particularly in certain industries such as warehousing, general labor, and similar fields.
Fair Labor Standards Act Requirements
The Fair Labor Standards Act (FLSA) is a federal law that outlines the rules that define exempt (from overtime pay) and non-exempt positions, and mis-categorizing an employee can result in stiff penalties. Most states also have their own laws regarding overtime, and some states have requirements that are more stringent than the federal guidelines, such as California, Alaska, Nevada, and others. You can search for the regulations specific to your state at FindLaw.
Under the FSLA, in order to be classified as exempt, an employee must perform executive, administrative, or professional job duties, and they must earn more than $23,660 per year. In general, salaried employees are expected to complete their job duties in as much time as it takes, and they receive the same amount of pay regardless of whether they work 30 hours or 60 hours in a given week. Salaried employees considered “exempt” are not entitled to overtime pay if they work more than 40 hours in a week, but merely paying an employee a salary does not automatically make them exempt. Employees earning a salary who are not classified as exempt under the FLSA must still be paid overtime pay if they work more than 40 hours in a week.
Hourly employees, on the other hand, are generally assigned a set number of hours, and they get paid for the actual hours worked. Hourly positions are often classified as “non-exempt,” meaning that they are not exempt from and therefore eligible for overtime pay if they work more than 40 hours in a week.
Employees are generally considered non-exempt until proven otherwise. Thus, hiring an employee on an hourly basis eliminates the need for employers to prove that an employee meets the FLSA criteria to qualify as exempt.
Better Control of Payroll Costs
There are some other distinct advantages for companies in hiring employees on an hourly basis vs. hiring salaried employees. First and foremost, hiring a salaried employee means committing to their full-time salary even during slow periods.
While it can be more predictable (knowing that you’ll owe the employee a certain dollar amount every two weeks, for instance), it’s also not as flexible. With an hourly employee, you have the ability to adjust their hours up or down depending on the current demand, which gives you a bit more control over labor costs. And while it’s possible to hire part-time employees on a salaried basis, it’s not typically the case; if you’re looking for part-time workers, hourly pay is generally the more logical option.
Ability to Pay Minimum Wage
The current federal minimum wage is $7.25 per hour, which is the minimum pay required by law for hourly employees. Salaried employees, however, must be paid a minimum of $455 per week in order to qualify as exempt, which for a 40-hour workweek works out to $11.38 per hour. That means that you’ll save money on hourly employees, even for positions that typically pay $10 or $11 per hour.
It’s also worth noting that the minimum pay for salaried employees was set to increase from $23,660 to $47,476 on December 1, 2016. While the change was postponed, it’s likely to happen at some point in the future – which would increase the weekly minimum to $913 from $455, or $22.83 per hour for a standard 40-hour workweek. For positions that are expected to pay less than this minimum for several years, it makes more sense to hire on an hourly basis.
Simpler Overtime Pay Calculations
For employees who are non-exempt under the FLSA, paying them on an hourly basis makes sense when it comes to overtime pay, too. As mentioned, non-exempt employees must be paid overtime for working more than 40 hours per week, regardless of whether they are paid on an hourly or salary basis.
Calculating overtime pay is simple for hourly workers – simply multiply their standard hourly rate by 1.5 for “time and a half,” which is the method used for overtime pay by many companies, or by 2 for “double time,” a method sometimes used for employees who work on holidays or in other circumstances, but double-time policies vary from employer to employer.
Savings on Benefits
If your company employs hourly workers on a part-time basis, you may not be required to provide certain benefits for those employees. Under the Affordable Care Act and the IRS, a full-time employee is one who works 30 hours per week or more, or 130 hours or more on average per month. Employees working less than these thresholds aren’t eligible for some benefits under federal regulations, meaning you’ll save on the cost of providing health insurance, paid time off, and other benefits, unless your company provides these benefits for part-time employees.
State laws may differ from federal law in some cases, so be sure to verify your state’s requirements to ensure that your policies are in compliance with both federal and state regulations.
The Employee’s Perspective: Hourly vs. Salary Pay
While hourly pay can be appealing to businesses for the cost-cutting benefits it can provide, the same arrangement isn’t always desirable for employees. For instance, a job that pays hourly and doesn’t involve enough regular hours to qualify for benefits means an employee is on their own to secure health insurance. And fewer hours, of course, equates to lower pay.
For some workers, this is a non-issue. Younger workers are able to remain on their parents’ health insurance until they reach age 26, so access to a company-sponsored health insurance plan may not be a deal-breaker. Some workers take on part-time, hourly jobs as supplemental income, meaning they’re already working full-time somewhere else. For these workers, only working a few hours each week at one job doesn’t necessarily mean they’re not able to make ends meet, and in fact, it might be just the arrangement they’re looking for to supplement their full-time earnings.
On the other hand, not working full-time hours or not having access to full-time benefits can be a problem for some workers. In this case, you could be trading employee retention for lower costs – you might see a short-term cost-cutting benefit, for instance, but you may end up hiring and replacing employees more often than you’d like as your employees secure jobs with more hours and benefits elsewhere. If you want to focus on lowering costs by optimizing employee hours, a staffing platform like Wonolo could be a good choice. Wonolo makes it possible to fill shifts with skilled, vetted workers in minutes, with HR and legal compliance built-in.
Hiring employees on an hourly basis offers several benefits for employers and provides a way for companies to control costs, which is particularly useful for companies that experience fluctuating demand due to seasonal shifts or other influences. And with the FLSA having clear guidelines on which workers may be classified as exempt, hiring on an hourly basis is often a safer bet to ensure compliance. If you’re laser-focused on cutting costs, a staffing platform like Wonolo is a great choice to reap the benefits of hourly workers without hassles or headaches.
Angela Stringfellow is a writer with 10+ years of experience. She focuses on news, trends, and insights in marketing, business, and technology.