If you’re currently on the job hunt, you may end up applying for a variety of roles. And in the ideal scenario, you’ll receive more than one attractive job offer that you get to choose from.
But what happens if you get offered two similar roles with very different pay structures?
It can be hard to understand which one is best when one employer is offering you an hourly rate and another is offering a salaried position.
While there are pros and cons to each option, understanding the key differences, as well as the laws in place, will help you decide which is the best option for you.
In this article, you’ll learn the differences between exempt workers vs. non-exempt workers, the perks and disadvantages of salary vs. hourly pay, and whether or not you can potentially switch from one type of pay to another without changing jobs.
A few decades ago, most employees were overworked and underpaid.
To protect employees from these unfair practices, the government released the Fair Labor Standards Act (FLSA), a law that states that employees have the right to a minimum wage and overtime pay, excepting those who are considered exempt.
The word “exempt” means being free from a given obligation. So, being an exempt employee means that you don’t qualify for overtime pay and minimum wage.
In other words, the main difference between these two categories lies in the obligations your employer has respecting your pay. That is, the “protections” of wage and hour laws of your state, as well as those provided by the federal government.
Whenever a non-exempt employee works beyond 40 hours on a given week, the employer should pay overtime. Exempt employees, on the other hand, can or cannot receive overtime pay, depending on the employer’s judgment.
Also, non-exempt employees are commonly paid by the hour, whereas exempt employees have a fixed salary.
Now, why does this matter?
Being aware of your job classification will help you make better decisions along the way. Also, knowing the responsibilities your employer has towards you will help you make sure you get paid fairly and avoid potential misunderstandings.
To be considered exempt, an employee must meet certain criteria, including:
In terms of compensation, exempt employees must earn at least $684 per week or $35,568 per year (as of January 2020). And the employee’s job duties must meet the requirements of one of the exemptions listed in the Department of Labor’s Fact Sheet #17A.
Some of these exemptions are:
Executive: the employee should direct the work of two or more employees.
Administrative: the employee should perform activities that are directly related to the operation of the business.
Professional: employees with an advanced knowledge in a specific field.
Outside sales: sales done outside the employee’s place of work.
Salary alone is not enough to determine whether you are exempt or non-exempt. Your job duties must also meet the requirements listed above. Otherwise, your role is not considered exempt.
For instance, some employers offer non-exempt employees a salary, but they also track the hours worked and pay overtime. To be considered exempt, a given employee must meet the criteria for both compensation and duties.
Neither you or your employer can choose to make a position exempt or non-exempt, as it’s classified depending on the characteristics of the job.
So, depending on the type of job you’re going for and the average rate of pay for that position, you (and your potential employer) may not have a choice about whether you are offered an hourly rate or a salary.
To clarify these concepts, here’s a quick side-by-side comparison:
|Non-exempt workers||Exempt workersExempt workers|
|Must make at least minimum wage per hour||Must make at least $684 a week and meet specific job duties required by FLSA|
|Qualify for overtime pay of time-and-a-half when working more than 40 hours per week||Don’t qualify for overtime pay but may qualify for bonuses and commissions|
|Typically have hourly jobs||Typically have salaried jobs|
Before accepting a job offer or a promotion, we suggest you have an honest conversation with your employer and ask the classification your job falls into. This way, you’ll have clear expectations on the type of compensation you should expect.
Now that you understand the main differences between salary (exempt) and hourly (non-exempt) pay structures, how do you calculate each?
Let’s break the steps down:
In short, here are the steps:
Define your hourly wage
Calculate how many hours you worked in the last period
Multiply the hours you worked by your hourly wage
If you worked beyond 40 hours, multiply the extra hours you worked and multiply them by time-and-a-half your hourly wage
For example, let’s say that you make $8 an hour and you worked 60 hours last week. Here’s how you should calculate your pay:
40 (hours per week) * 8 (hourly wage) = $320
20 (overtime) * 12 (hourly wage * 1.5) = $240
This means that, in total, that week you’d have earned $560 (before taxes) as an hourly worker.
To get a more clear comparison between these two paid structures, you should turn your annual salary into an hourly wage.
Define how much you earn per year (e.g. $36,000 per year)
Divide your annual income by the number of paid work days in your company (typically, companies use a 260-day calendar to base their salaries). The result will indicate your daily income.
Divide your daily income by eight to calculate your hourly wage.
For example, imagine that you earn $30,000 per year and you’re paid on a weekly basis. Let’s also say that the company you work for bases salaries on a 260-day calendar. In this case, here’s how you should calculate your pay:
$30,000 (annual income) / 260 (days worked) = $115.38 per day
$173.07 (daily income) / 8 (daily hours worked) = $14.42 per hour
In this scenario, this salary pay structure seems more attractive compared to the hourly option shown above. Just remember that, sometimes, getting a fixed salary also means working more without getting overtime pay.
By calculating these two options side-by-side, you can get a more accurate perspective and make a more informed decision on the job offer that seems more convenient to you.
In general terms, you can — it’s legal.
It doesn’t always depend on you, though. An employer can make status and pay structure changes to any at-will employee, at any time.
But even if you weren’t hired “at will,” your employer might offer switching your pay structure. In some cases, the switch means a promotion. Other times, it means the company is trying to cut costs.
Whatever the case, here are some things to consider:
When you’re offered a salary, it’s the perfect opportunity to negotiate your rate of pay. Even if you don’t want to earn more, you should still define an acceptable salary based on the hourly wage you’re currently earning.
You can use the calculations shown in the previous section to come up with a better conclusion.
We also suggest you have an open conversation with your employer and ask the implications this switch might bring to your specific situation.
If you’re going from a salaried pay structure to an hourly wage, be careful. Salaried employees generally earn more than hourly (and they have the added benefit of a consistent paycheck). If you’re not working a full 40 hours each week, your annual pay may decrease.
Now, this doesn’t mean that switching from salary to hourly is always bad. The only way to know for sure is by making your calculations and seeing which option is more beneficial to you.
That’s the question, right?
To be honest, the answer depends on a few factors, including:
Overtime: by using the calculations above, you can determine whether overtime is worth it.
Benefits: confirm with your employer (at the point of wage negotiation) the benefits included for the status that is offered for the position.
State laws: sometimes state laws may classify you differently than federal law (e.g. in some states, exempt workers earn more than the federal law’s minimum wage).
To get a more accurate comparison between the two pay options, let’s cover some of the pros and cons of each:
If you’re an hourly employee, you earn a fixed rate per hour. You’re typically classified as non-exempt and required to be paid overtime when you work more than 40 hours per week.
Let’s take a look at the pros and cons of being an hourly employee:
The opportunity to earn more by working more.
More flexibility over your schedule, especially if you’re a part-time hourly employee.
You’re eligible for overtime pay if you work more than 40 hours per week.
In hard times, an employer can cut some hours of work and, thus, reduce your income.
You may have reduced benefits, especially for part-time employees (e.g. lack of health care insurance).
You’ll only be paid by the amount of hours that you work (e.g. if your employer calls the day off for some reason, you’ll probably won’t get paid for the hours you didn’t work).
If you’re an hourly employee, you may love getting the option to work overtime. If you’re salaried, you may have to stay late more often without extra pay
If you’re a salaried employee, you’re paid a fixed annual salary rather than being paid by the hour. Regardless of the number of hours you actually work, you will still get a steady paycheck.
Salaried workers are typically classified as exempt and aren’t eligible for overtime pay.
Let’s take a look at the pros and cons of salaried employees:
Consistent amount of pay, regardless of the number of hours worked.
Get extra perks and benefits (i.e. health insurance, life insurance, paid vacations, etc.).
Feel more overall job security.
You may need to stay extra hours to fulfill higher responsibilities without pay.
You may not be eligible for overtime pay.
You may feel pressured to be “on” all the time
Both salaried and hourly-paid employees get both advantages and disadvantages.
Salaried employees get the security of a steady paycheck, whereas hourly-paid employees have the opportunity to put in some extra hours and increase their income.
In the end, choosing to be a salaried employee or an hourly employee, will depend on your unique needs, preferences, and future goals. But remember, it doesn’t always depend on you.
Ready to learn more? Need more resources? At Jobcase, we love empowering employers and employees to achieve work-life success. Learn more from the Getting Hired Resource Center.