When it comes time to expand the team, startup founders are often faced with the decision of whether to hire employees on a salary or hourly basis. Generally, salaried employees do not receive overtime pay if they work more than 40 hours per week (although there are exceptions), but they are guaranteed a certain amount of pay regardless of the number of actual hours worked. Hourly employees, on the other hand, may make more or less in a given pay period based on the number of hours they’ve worked.
There are, of course, rules surrounding the classification of an employee as exempt (from overtime) or non-exempt, outlined by the Fair Labor Standards Act (FLSA). The proper classification is based on a number of factors, such as the nature of the work, the amount of money an employee earns per year or per week, and others.
When startups are looking to expand their team, how can they determine whether new positions should be paid on an hourly or salary basis, and which option is better for startups? To gain some insight, we reached out to a panel of business leaders, startup founders, and HR professionals and asked them to answer this question:
“Salaried employee or hourly, which is the best option for startups and why?”
Meet Our Panel of Business Leaders, Founders, and HR Pros:
- Jeff Neal, Owner & Operator
- Sean Mallon, CEO
- Kevin W. Smith, MBA, Consultant
- Bryan Clayton, CEO
- Amy Esry, Human Resources Consultant
- Samantha Reynolds, Communications Coordinator
- Mikhail Shvartsman, ESQ, In-House Counsel and Director of Marketing
- Deborah Sweeney, CEO
- Jeremy Schaedler, Founder
- Bob Clary, Director of Marketing
- Stephanie Thacker, Founder & CEO
- Charles Vethan, Esq., Founder & CEO
- Rachel Charlupski, Founder
- Thomas J. Williams, EA, Accountant & Owner
- David Miklas, Labor & Employment Lawyer
- Will Hannum, Managing Partner
- Jake Lane, Head of Growth & Marketing
- Laurie Brednich, CEO
- John Pitchko, Senior Advisor
- Georgene Huang, CEO & Co-Founder
- Guilherme Faria, Entrepreneur & Managing Partner
- Steve Pritchard, Founder
- Stephen Gibson, Founder
- Richard Hayman, CEO Mentor & Coach
- Tawanda Johnson, President
- Mark M. Billion, CEO & Principal Software Architect
- Ian McClarty, President
- Cristian Rennella, Co-CEO & Co-Founder
- Courtney Barbee, COO
- Scott M. Behren, Esq., Trial Lawyer
- David Batchelor, President & Co-Founder
- Vinayak Ranade, Founder & CEO
- Bret Bonnet, Co-Owner & Founder
Find out what our experts had to say about the benefits of salary and hourly employees for startups by reading their responses below.
Jeff Neal owns and operates The Critter Depot.
The key difference between salaried and hourly is what the task or tasks are…
If you have a very clear, distinct task that needs completed, then that would be an hourly pay. Like writing blog articles. Or packing crickets.
However, if you have an employee that wears multiple hats and has the prowess and skill set to make good decisions, then that person would make for a better salary position. Because a person with that type of responsibility might work 60 hours a week, or they might only work 30 hours a week, depending on how busy the season is.
Sean Mallon is the CEO of Bizdaq – a business transfer marketplace – and has over ten years’ experience in working with small business owners. He helps small business owners find buyers and buyers find businesses.
For me, it always has to be salaried…
Hourly pay can seem like a good option – as staff know that any overtime will be paid, they can be more receptive to working longer hours – however, in my experience it can work against you as well.
For a start, hourly wages can put off some candidates. When compared to a salaried job, which has definite working hours and definite pay, an hourly wage could mean that employees might not be required to work all the time, or as much as a full-time job – leaving them out of pocket at the end of the month if they don’t work. This can restrict your access to talent (experienced workers are more likely to know their worth and seek it out rather than chase a job that might pay more), and as talent is so important for any startup, can hinder you from the get-go.
Another reason is that workloads are easier to plan with salaried employees. As both you and they know exactly what times they’ll be working, you can arrange work schedules around it – say if you know it’s going to be busy soon, you can plan around it knowing that people will be in. With hourly-paid staff, unless there’s a strict schedule, they’re almost free to come and go as they please.
Kevin W. Smith
Kevin W. Smith, a 20-year veteran of the financial services industry, harnesses a network of skilled writers, designers, and subject matter experts. The team draws on their experience and expertise to deliver strategic marketing solutions to clients. Kevin holds his MBA from the Stern School of Business at New York University and a BA in Economics from George Washington University.
If you can swing it and you have a roster of dependable contractors, neither!
When you’re starting out, you want to maximize flexibility and minimize the number of decisions you make because you need the revenue. I focused on building my company using only 1099 contract help which comes with no fixed costs and helps keep overhead low. This means I can make decisions that are right for the long-term viability of the business while still tapping expertise when I need it to get the work done.
Bryan Clayton is the CEO of GreenPal, which is best described as Uber for Lawn Care.
Most startup entrepreneurs don’t realize this, but the first five hires you make will make or break the potential success of your company…
Simply stated, if you get any one of your first hires wrong it could limit your chances of success or even spell doom for your fledgling start up.
As it relates to the salary versus hourly debate on how to pay your first few employees, it’s been my experience that if you feel that your employees are going to need to be tied to an hourly rate to get the kind of productivity you need out of them, then that is probably good indicator that you don’t have the right person on the bus.
Put another way… Your first three or four people need to be salary-based people that you can delegate responsibilities to and let them run with it.
If you’re having to micromanage their day-to-day tasks and tie their compensation to hours spent in their office chair, then it’s probably a good sign that you don’t have the right person at this stage of the game.
Much later down the road when you get to be over 50 people and you have systems in place to extract the grunt work out of teammates, then an hourly pay structure may make sense; however, in the beginning, salary-based employees will need to take ownership in the company’s vision and direction, and that’s going to be what’s needed for success.
Amy is a Human Resources Consultant for Hausmann-Johnson Insurance.
Making someone salaried exempt is not something that an employer may be able to choose…
The employee needs to meet certain criteria under the Fair Labor Standards Act (FLSA) to qualify to be exempt from minimum wage and overtime rules. So a Help Desk person, for example, might not legally qualify to be classified as salaried exempt. This is something that a lot of employers, especially in smaller companies, might not understand and can easily expose them to wage and hour lawsuits. So the first step in determining how to pay each position is to determine if they even qualify to be salaried exempt. The US Dept. of Labor website has a lot of information on the FLSA to help guide employers.
Samantha Reynolds is the Communications Coordinator for A Plus Benefits. They are a Professional Employer Organization (PEO) with over 27 years of experience working with small businesses to streamline their payroll, human resources, benefit and worker’s compensation processes. She has had the pleasure of working with businesses owners to reduce liability and increase efficiencies in all of these areas.
Determining whether someone should be paid hourly or salary can be a difficult decision for new companies and one that often causes legal issues down the road…
First, to be clear, paying someone a salary does not mean they are automatically exempt from being paid overtime. The Fair Labor Standards Act has clear definitions of the requirements for someone to be considered exempt from overtime and being paid a salary is only part of it. This means that you may need to track the hours your employees are working, even if you pay them a salary, so that you can appropriately pay them overtime. Overtime calculations can also often be difficult to determine for salaried employees because they don’t have a standard per-hour pay rate. Their pay rate when converted to hourly could vary pay period to pay period.
Because this often causes confusion, unless you are sure your employees meet the requirements for an exemption from overtime, it is easiest to pay the employee hourly. This allows you to easily calculate overtime pay amounts. You cannot legally just pay someone a salary and use that as your reasoning for not tracking their hours or paying them overtime.
Mikhail Shvartsman is In-House Counsel and Director of Marketing at USB Memory Direct.
At our company we have mostly salary employees…
We went from 1099-hourly when we were a fresh startup to full-time employees. There are benefits to both, but we found for the startup environment salary is more copacetic. In startups, as in all business, management needs a healthy sliding scale between laissez-faire and authoritarian policies. Salaries fall more on the laissez-faire spectrum, which creates a more relaxing environment for the employees. Take Google as an example; they built a whole campus of activities for their employees, mandate long lunches, and focus more on employee happiness to get efficiency. In our business we try to follow a similar model. However, in some businesses, say securities lending, startup or not, a more authoritarian approach is needed. Thus incentivizing longer hours and a “get paid to work more” policy is more beneficial.
Deborah Sweeney is the CEO of MyCorporation.com. Based out of Calabasas, CA, MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, trademark, & copyright filing services.
During salary negotiations, keep in mind that the starting salary is often merely a starting point…
I feel that the better approach is to get a ‘decent’ base salary, but then to discuss opportunities for growth and salary increases once you prove yourself. We pay our interns hourly because they are usually with us only 6 months to a year, unless hired after. However, employees are paid salary due to the fact they are in it for a longer run!
Shortly after graduating from the University of California, Los Angeles with a Bachelor’s degree in economics in 2005, Jeremy founded Schaedler Insurance, a Northern California-based insurance agency specializing in surety bonds for California construction professionals. Jeremy is happily married and the proud father of two young boys.
Startups looking to decide which pay scale works best should first…
Check their state’s employment laws regarding salaried employees versus their hourly counterparts. Some may have regulations on how many hours salaried employees can work and what, if any, benefits they may be entitled to.
Additionally, startups will want to clearly define the positions they are hiring for as some may be more suitable to hourly pay scales, such as clerical work, while others, such as key personnel, may be more suitable to salary if they are to be working full time or more. Some advantages to hourly include the ability to hire several part-timers for lower-level work, which may be more advantageous in some instances than a single full timer.
Bob Clary is the Director of Marketing for DevelopIntelligence.
While the conventional wisdom says salaried, I’d make the argument for hourly for one simple reason…
You want your startup employees to work a lot, especially in those critical early phases. Why not give them a direct incentive to work more? The promise of a salary can be offered once a company has reached some level of stability, but in the startup phase you want to incentive hunger and drive.
Stephanie Thacker is the Founder and CEO of Steadfast Bookkeeping Co., a bookkeeping firm offering a wide range of bookkeeping and payroll services to small businesses all across the US. She is an all around Florida girl, enjoys being outside in the sunshine, and proudly accepts the title of “number nerd.”
As a startup, it seems like you have endless decisions to make that you maybe never even thought of before, right?
One of those decisions is in regard to hiring. Should my employees be hourly or salary? Let’s dive into those two options and discover what is best for startups and why.
Hourly Employees – An hourly employee is an individual that is hired by a business to perform a job at a set hourly rate. This employee is considered “non-exempt” by the Fair Labor Standards Act (FLSA) which means the individual is entitled to overtime pay. FLSA sets minimum wage amounts, overtime pay standards, and other general standards when it comes to employee pay and recordkeeping. It’s always a good idea to check out the latest updates from FLSA before hiring to ensure you are within the guidelines they currently have set.
If you make the decision to hire an hourly employee, you need to make sure you are setting their hourly rate at or higher than the current minimum wage for your state and also realize that any time worked over 40 hours in any given work week must be paid overtime at one and a half times their normal hourly rate.
Hourly employees are typically working in roles that are not on the executive level. For example, tasks that are administrative, require manual labor, or are on an entry level are typically jobs for hourly employees.
Salary Employees – A salary employee is an individual that is hired by a business to perform a job at a set salary amount (whether weekly, monthly, or annually). This employee is considered “exempt” by the Fair Labor Standards Act (FLSA), which means the individual is not entitled to overtime pay.
Salary employees are given a salaried amount and in return work to provide the agreed upon duties without taking into consideration how many hours are worked to complete those duties. In this case, if an employee works 20 hours one week and then 50 hours the next, it doesn’t matter; he still receives his set salary pay regardless of the hours worked.
The option of salaried employees sounds appealing to many startups because of the “exempt” status. We all know that a lot of work goes into starting up a business and sometimes that means many, many long hours by everyone involved in the business. The idea of being able to pay everyone a set salary and not having to budget for overtime sounds great, right? Well, not so fast! There are two “tests” you need to take to determine whether or not the employee you are looking to hire is really eligible for salary or not.
Test #1 – The Salary Test
Currently, an employee can’t be considered “exempt” from overtime unless they are paid at least an annual salary of $47,476 annually or $913 weekly. This means, you can’t hire an assistant at $30,000 per year and expect them to work 50+ hours per week with no overtime pay. If you want someone to be salary, you’re going to have to pay that minimum salary amount to make it legal.
Test #2 – The Duties Test
This test isn’t quite as straightforward as the salary test, but it’s still important. You need to be sure that the employee you are hiring is performing at an Executive or Professional level if you plan to pay them salary. These employees should generally be making decisions for the business, supervising other employees, and/or managing departments. You can read more about the requirements on the Department of Labor site.
So, now that you know the difference between hourly and salary employees and what requirements you have legally, it’s time to make the decision. My recommendation for startups would generally be to just hire hourly employees unless you are hiring for high level executive positions such as CEO, CFO, etc. If the employee is not going to be a key player in the general operations of the business, hire hourly and be sure you have a good bookkeeping and tracking system in place so you can easily see their hours and be able to manage and control overtime before it happens.
Charles Vethan is the Founder and CEO of Vethan Law Firm. For over twenty years, Vethan Law Firm has delivered top-tier legal counsel to private businesses and professional practices of all sizes, their founders, investors, partners, and management teams.
It depends on a lot of things, like your industry…
Is it typically based on hourly pay or salary? You should also evaluate the size of your business, how much a new hire would cost you, and the profit margins of your business. There are pros and cons to both types of employees. Is your business just starting out? Employing hourly workers can offer more flexibility, since if laws change or the company goes through tough times, you can cut hours when needed.
If your company isn’t bringing in steady business or tends to be more seasonal, hourly workers may be a good option to consider. However, hourly employees are typically nonexempt from the FLSA, which means you owe them overtime pay. You should also have a thorough record-keeping process for these hourly employees to avoid compliance issues with the Department of Labor, with a system that efficiently records all of your employees’ time on a weekly basis.
Salaried employees can offer a workforce with high skills and lower turnover, so if you have a stable business, this option might be better suited for you. But with salaried employees, you may have to invest in additional benefits and perks to attract qualified candidates. You’re also on the hook for the amount you’ve agreed to pay them, regardless of how many hours they work, but salaried employees are typically exempt from the FLSA overtime requirements.
Rachel Charlupski is the Founder of The Babysitting Company. They personally interview hire and train babysitters for reports, hotels, travel, sports teams, and special events in most major cities.
In our experience a salaried employee works out much better…
Not only do they feel more appreciated, but they are happier about their work and feel more invested in the company, especially when they can make their own hours. With a startup especially, there is no such thing as 9-5. It is a 24-7, and we provide every employee with a company phone and computer and allow them to make their own hours. This allows for them to work whenever they feel necessary even outside of normal business hours. We also do paid vacations and working vacations. They are also able to work from home, except on Mondays.
Thomas J. Williams
Thomas J. Williams, EA is a tax accountant who operates Your Small Biz Accountant, LLC, a virtual boutique practice with a focus on rental real estate.
The choice between hourly or salaried employees boils down to cash flow and corporate culture…
You must consider what you would like to achieve in the long run. Do you want to experience turnover? Are you willing to make a training or education investment into an employee who may leave unexpectedly because of your pay structure? Do you prefer that your customers have a consistent experience with a stable workforce?
Being offered a salary is more enticing to a prospective employee than an hourly position because it is deemed more secure and worthwhile. However, during lean times, the expense of a salaried position is harder to adjust than an hourly job where you can reduce the employee’s hours. Salaried workers depend on their check to pay their bills, so they are not likely to accommodate a pay cut, whereas offering an hourly position with variable hours may be a more economical option.
David Miklas is a labor & employment lawyer with 18 years of experience working with small businesses preventing and defending litigation on all types of employment law matters including discrimination and wage and hour violations.
Employers may unwittingly create legal liability by assuming that they do not have to pay overtime to a worker because they pay that worker a salary…
Although an exempt employee can be required to work many hours with no overtime pay, those employees who are non-exempt are entitled to time and one half for all hours worked over 40 in a workweek. Therefore, if an employer misclassified a worker as exempt from the overtime pay requirements of the law (Fair Labor Standards Act (FLSA)), that employer could be on the hook for back pay and fines and other damages if either the worker hires a lawyer or if the Department of Labor (DOL) comes knocking.
Startups should either contact an experienced labor & employment lawyer or at the very least, review the DOL’s webpage. The DOL has fact sheets that give very basic information about the salary test and the duties test that must be met in order to legally not have to pay a worker overtime or minimum wage.
Will is Managing Partner of Schwartz Hannum PC. Prior to joining the Firm, Will was an associate in the Labor and Employment Law Section in the New York office of Morgan, Lewis & Bockius LLP.
The legally correct answer to your question depends upon the job duties performed by the employee…
Some employees must be paid on an hourly basis, and must get paid overtime for all hours worked over 40 hours per week. But, nonetheless, an individual business owner’s answer may also depend on his/her risk tolerance for getting sued.
Note: an employee who wins a wage and hour lawsuit will typically be entitled to not only additional overtime pay, but also double (or treble) damages (depending upon applicable state law) and/or attorneys’ fees.
Jake Lane is the head of growth and marketing at Press, an Austin-based startup that’s putting a modern spin on laundry and dry cleaning. Their on-demand service comes with free pickup and delivery so that their customers stop worrying about laundry and go spend time doing what they love.
Being in a startup can be tough, and it’s not for everyone…
Most startups require A LOT more work than the average 9-5, so 40 hour work weeks are pretty much non-existent during early stage growth. If a startup is trying to save money, a salaried position is the way to go, especially at the hours that a startup team puts in. For instance, the average salary in Austin for a web developer is a little over $60,000. That’s $25/hour for 40 hours a week. Now if you work startup hours of 50 to 60 hours per week, you’re paying a lot more than if that position was salaried. Not to mention the distractions of keeping track of time and payroll.
Bottom line, if you want a team member that’s going to hustle without having the distraction of tracking time and being off the clock, hiring salaried positions is the way to go. Startups have to focus on growth, and having unnecessary distractions like tracking time worked means that time was spent doing something other than moving the dial.
Laurie Brednich is the CEO of her own startup, HR Company Store. They are a search engine to help HR professionals find, rate, review and solicit bids from vendors – including recruiting job boards like Wonolo.
There are legal implications that can impact an employer wrongly classifying their employee as salaried vs. hourly…
These rules are dictated under the Fair Labor Standards Act (FLSA). This act provides the guidelines in which a person can/should be classified as one or the other. These guidelines (tests) include a salary test and a duties test. Many startups make the mistake of assuming that their employees are salaried when in fact, based on FLSA rules, are actually hourly. These types of mistakes can wind up with the employer in court.
Startups especially need to work with a compensation expert to determine based on the skills they are looking for and the job description that is created whether or not the position is salaried or hourly. This will save them many headaches in the long run. Compensation consultants, along with many other types of vendors can be found on HR Company Store!
John Pitchko works as a Senior Advisor at Innovate Calgary, a startup incubator in Calgary, Alberta, advising technology startups on business development. Previously, John worked as a Project Manager for Royal Dutch Shell, leading over 25 global technology projects. John holds an MBA from the University of Calgary and a BSc (Computer Science) from the University of Regina.
While long-term costs for salaried employees are easy to forecast (i.e. founder know that their total worker cost for the entire year is $x)…
There are several advantages that hourly rates have over salaries. Firstly, the labor cost is not hidden from founders. Unless workers are tracking their hours, founders with salaried employees are unlikely to understand the true amount and cost of labor being spent in their business. This can cause founders to incorrectly estimate their current and future costs.
Secondly, salaries may discourage workers from putting in extra hours in their jobs. While it is true that startup employees need to buy in to the mission of the venture and make personal sacrifices to ensure the success of the venture, excessive hours with no compensation or tangible reward may cause them to question their commitment.
Thirdly, hourly rates help founders understand the impact of adding features or changing design. For example, if a new feature will require an additional 40 hours of labor, founders will immediately understand that the feature will cost $4,000 to implement (assuming a $100/hour rate). Using this information, founders can determine if the new or changed features will create a positive return on investment. In the previous example, whether the new feature will allow the venture to earn $4,000 more revenue.
For these reasons, startups paying hourly rates will be more disciplined in their spending and have better awareness of their costs than those paying salaries. When products and cash flows stabilize, startups can then evaluate if salaries are the better option.
Georgene Huang is obsessed with improving the workplace for women. She’s the CEO and Co-founder of Fairygodboss, a marketplace where professional women looking for jobs, career advice, and the inside scoop on companies meet employers who believe in gender equality. Previously she ran the enterprise business at Dow Jones and was a Managing Director at Bloomberg Ventures. She is a graduate of Cornell and Stanford Universities.
I believe that the best answer for startups is a combination of both salaried and hourly employees…
As the founder and CEO of Fairygodboss, a 2-year-old start up based in New York City, we have hired a team of both hourly freelancers and part-time workers as well as full-time, salaried employees. We have transitioned a few hourly employees to full-time employees as our business needs changed and we grew. Generally, when I meet a prospective employee who is very talented and hard-working, I feel greedy and want them all to ourselves. However, often times that’s simply not practical because the workload doesn’t justify the full-time hire.
For startups, resource scarcity and constraints is a real thing, and I think managers and founders have to be realistic about the fact that you don’t hire a salaried role until you truly have a full-time job (or maybe a full-time job +). When you have a full time person doing 1.3 times a full-time person’s job or 1.5 times a full-time person’s job, that’s when you start to think about hiring your next full-time salaried position, but you may need to bridge the gap with an hourly freelancer until that point.
As an entrepreneur, Guilherme Fariahas started various businesses and is presently the Co-Founder of Penbrothers International and a Managing Partner of Upteam Corporation.
It really depends on the stage of the company…
If a business is at its start, hiring people by the hour can be a solution. However, as the business grows, teams need to work together and cooperate, so the hourly payment solution does not work anymore. Teams at this level cannot be managed by the hour, but by output, as the work is always more challenging than expected.
Steve Pritchard is the Founder of Cuuver.
Salaried positions often come with greater responsibility…
And help you, the employer, to offer additional perks, such as a more flexible working schedule, because they are being paid a set amount, not depending on how many hours they clock up. It’s also easier to offer salaried employees paid vacation days.
It has been proven in various surveys that salaried employees are generally happier than those who receive hourly pay. Their pay is usually higher and they are guaranteed a set amount of money will be paid into their bank each month. If a salaried employee finishes all their work by 3pm, they may be able to leave early, whereas an employee who is paid by the hour does not have this luxury.
While salaried employees do not generally get overtime for putting in extra hours, their promotional benefits can be greater for doing this extra work. For example, they could earn an extra vacation day a year, a bonus, or greater pay raise. Furthermore, if a salaried employee is half an hour late for work one morning, their pay will not be docked.
Stephen Gibson is the founder of creative startup blog Vyteo.com where they feature poetic reviews of the latest upcoming tech companies. Since 2009 they’ve written over 500 of the best startup reviews on the planet.
As a long time startup blogger…
And former director and project manager, I’ve worked with startups in a variety of capacities. Startups come in all shapes and sizes. Uber won the best startup of the year at the Crunchies back in 2014. Its business needs are quite different than the startup consisting of a small band of people moonlighting their pet project. For well funded, well designed, and well planned companies, paying people salaries is almost invariably the preferred option. Doing so helps establish a sense of team and permanence, which helps recruit the top talent.
For smaller companies that are still finding their way and may have a few pivots in their path before profitability becomes an option, then hourly employees are best. They work well with the ebb and flow of changing business needs. One thing to note is contract employees may be more well rounded and resourceful than those that are more comfortable with having a salary. They also may have a better mind for business since they themselves market themselves. So starting with hourly contractors can have multiple benefits beyond the added flexibility they afford.
Richard Hayman is a CEO Mentor & Coach who has spent more than nine years in client consulting.
There must be a mix…
For positions that are considered to be in a career path – yes.
Positions where you want the employee to think about work every waking hour and then some – yes.
Dead end jobs, not in a career path, such as driver, runner, go-for, intern, etc. – no.
Tawanda Johnson is the President of RKL Resources.
Deciding whether or not to bring on an employee as hourly or salaried isn’t a straightforward answer…
In fact, the Fair Labor Standards Act (FLSA) provides guidance in determining if a position should be classified as hourly or salaried. My recommendation is to review FLSA guidelines and take a close look at the actual duties and responsibilities of the position. Depending on the type of startup, there is value in having a mix of salaried and hourly employees. Salaried employees tend to manage others, make critical decisions, and have a great deal of autonomy.
Mark M. Billion
Mark Billion is the CEO & Principal Software Architect of BankruptcyAnywhere.com. He created Delaware’s largest consumer bankruptcy law firm and has now launched a product that permits consumers to file their own cases using our online software.
For startups, hourly is better…
And it’s based on my father-in-law’s advice as the owner operator of a diner in Hazelton, PA.
Funding is finite – at least until you raise more – and often in a small startup one person is waiting on the next to finish up their project. Salaried staff results in payments being made even though work isn’t being done. It’s like having a bunch of line cooks working when the restaurant is empty, which is why my father-in-law explained that he always paid his employees hourly.
We rely on this advice so that we have the tightest control of our weekly (daily) cash burn.
Ian McClarty is the President of PhoenixNAP Global IT Services.
From my experience, salaried employees feel more invested in a company than hourly employees…
Also, a guaranteed wage allows them to focus on work and not how many hours they are going to be able to work that month to pay their bills.
Cristian Rennella is the Co-CEO & Co-Founder of oMelhorTrato.com.
A startup always starts by hiring by the hour…
It is a great advantage to be able to increase or decrease your expenses as you go.
The only people that you must have with a fixed salary are the programmers. They are the basis of your structure.
As an investor and entrepreneur, I have been able to see a large number of companies that fail because they have high employee costs, when in fact they are close to finding their business model to start growing but can’t do it and must close due to lack of resources (money).
Courtney Barbee is the COO at The Bookkeeper.
For startups where hours can run long, skill sets are limited to certain individuals, and information is often mentally siloed…
Salaried employees can be a very cost-effective option. Salaried employees are often highly dedicated individuals who feel invested in the company, and they come with the added benefit of not needing to be paid overtime. However, the IRS has been looking very closely at worker classification in recent years, so it’s imperative that any employer (no matter how small or new the company) ensures their employees meet FLSA standards for exempt status.
Scott M. Behren
Scott Behren is a trial lawyer that specializes in employment law, consumer rights, and business divorces.
You only should be paying employees salary if…
They fit within one of the exemptions under the Fair Labor Standards Act. Otherwise should be paid hourly. You need to formulate a job title and description for each position to determine whether an employee should be hourly or salary.
David Batchelor is the President / Co-Founder of DialMyCalls.com.
For a true startup, hourly is generally the better way since you can keep your costs down…
Ideally you could get your first few employees to work part-time or on an as-needed basis. Having a big payroll can be scary for a small company trying to make ends meet. Even better would be to hire people on piecemeal doing contract work as a 1099 until you have a more stable revenue stream in place. Only once you have that consistent cash flow coming in would I bring people onto payroll and have that added stress on your plate.
Vinayak Ranade is the founder and CEO of Drafted.
Here’s the golden rule for startups…
Keep things simple. Don’t create unnecessary work for yourself and your team. When it comes to startup productivity, salaried beats hourly because:
- You’d rather have your workers spend time working than counting their hours.
- When you have a small team, measuring output matters more than measuring activity.
- Salaried means less administrative overhead for you.
Bret Bonnet is a co-owner/founder of Quality Logo Products a $40M distributor of promotional products located in Chicago, IL.
The answer to this question has actually already been made by our good friends over at the Department of Labor…
An employer can’t arbitrarily make an employee salary vs. hourly. Only certain positions/tasks can even be classified as salaried. On top of that, there are dollar minimums for which qualifying positions can be paid salary or hourly. Also, just because an employee is salaried doesn’t mean they’re entirely exempt from overtime rules.
The laws governing salary vs. hourly and overtime are constantly changing. Each state has different laws. Both compensation types have their merits, but at day’s end, they end up costing the employer the same.
The Affordable Care Act also makes reporting requirements, including hours worked, mandatory for both compensation types. So, paying an employee a salary doesn’t even save you from having to track their hours/time!