The Pros and Cons of Salary vs Hourly Pay Employees | SoFi (2024)

Salary vs. hourly pay are two ways that businesses classify workers, based on how and when their compensation is doled out. Hourly employees, as you might guess, are paid for every hour of work that they do. Salaried employees, on the other hand, receive a fixed amount of compensation in exchange for their labor, regardless of how long it takes.

There are pros and cons to each, both for employers and employees, and there are numerous rules and laws that can come into play as well. But it boils down to this: Hourly employees’ compensation is tied to the time worked, plus applicable overtime. Salaried employees get a fixed amount.

What Is An Hourly Rate?

An hourly rate is the set per-hour compensation a worker or employee earns in accordance with their employment contract. That hourly rate can be any number above the federal wage floor, or minimum wage, of $7.25 per hour.

The lowest that an hourly worker in the U.S. can earn is $2.13 per hour, as set by federal law, for workers who receive at least $30 per month in tips. No matter the amount, an hourly rate is how much an employee earns for one hour of work.

What Is a Salary Rate?

As mentioned, salaried employees earn a fixed amount regardless of how many hours they work. As such, a salary rate is what an employee would earn over a fixed amount of time, such as a traditional 40-hour workweek. Since we typically discuss salaries on a yearly basis (for example, Job X pays a salary of $50,000 per year), a salary rate could be $961.54 per week ($50,000 annual salary divided by 52 weeks in a year).

The big difference, when it comes to salaried workers, is that there is no potential to earn overtime for working more than the predetermined number of hours (usually 40) as specified by their employer and applicable laws.

If you want to find out what is a good entry-level salary, you can do some research into averages in your industry and geographic area to get an idea.

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Why Are Some Jobs Hourly and Others Salary?

Federal laws and regulations determine whether some jobs can be exempt from overtime pay rules — in other words, salaried. This is to protect some workers from being classified as salaried when they may end up working many more hours in a given week than the standard 40.

Depending on the state you live in, there may be additional rules that stipulate why a position may pay hourly vs. salary.

The Big Difference Between Salary vs Hourly Pay

Whether or not a worker earns overtime pay is the single biggest difference between a salaried employee and one who is paid hourly. Overtime pay is paid out at a rate of 1.5 times the normal hourly rate, which is commonly phrased as “time and a half.”

Another way to describe salary vs. hourly pay is “exempt” vs. “non-exempt.” “Exempt,” in this sense, means exempt from overtime wages. Non-exempt employees are owed overtime wages for working more than 40 hours per week.

There are situations in which an employer may end up paying a salaried employee more for working more than 40 hours per week, but it depends on the specific agreement or contract between the two parties.

Additionally, salaried jobs tend to be more administrative, “professional,” or “white collar,” and may offer more or better benefits than hourly jobs. That’s not always the case, but if you’re climbing the corporate ladder and become a salaried employee, you may notice that the entire compensation package is a bit beefier than packages for hourly workers.

Salary Pay

As noted above, salaried employees earn a fixed amount regardless of how long they work. There are some obvious pros and cons to salaried positions, too:

Pros of Salary Pay

The clearest advantage of a salaried position is that an employee will earn the same amount of money during a given time period no matter how long they work. So, if they end up working 30 hours in one week, they still get paid the same as they would have if they worked 40.

Also, as discussed, salaried jobs often have better benefits, such as employer-sponsored health insurance and paid vacation days. Salaried jobs can also be a bit more secure than hourly positions and may offer workers more opportunities for advancement.

Cons of Salary Pay

Salary pay can be double-edged: While you’ll be paid for 40 hours even if you work only 30, you’ll earn the same if you work 50 hours, too. There is no chance for overtime pay if you work more than a standard week. That can be a big drawback for some workers.

Similarly, depending on the specifics of the position, it may be harder to keep your personal and professional life separate. Salaried positions may provide more benefits and job security, but that comes at a cost of more demanding work that may encroach on your personal time.

Hourly Pay

Hourly workers earn their paycheck by the hour. That, like salaried positions, can have pros and cons as well:

Pros of Hourly Pay

It’s worth stating again: The biggest plus to an hourly job is that you are eligible to earn overtime pay. That doesn’t mean hourly workers always will get overtime — many employers go to great lengths to make sure that they don’t — but it’s a possibility. And that can help ensure that you’re not working 50- or 60-hour weeks, which may be more common for salaried employees.

Also, hourly workers may earn double their standard wages on certain days, like holidays. And depending on the industry, working overtime may be standard or expected. That can help push an hourly worker’s earnings above salaried workers’, in some circ*mstances.

Cons of Hourly Pay

A big disadvantage to hourly-paying jobs is that they can be less secure than salaried positions. Turnover can be high, for example, and if the economy takes a turn for the worse, hourly workers may see their hours reduced, or their positions furloughed or eliminated. Further, hourly jobs aren’t usually very flexible, and may not offer paid time off or sick days to workers, either.

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The Takeaway

Salaried workers receive a fixed paycheck regardless of the number of hours worked, whereas hourly workers are paid based on the number of hours they clocked. The big differentiator between the two is that salaried workers are not eligible for overtime pay, which is 50% more than their standard hourly rate. Each type of employment has its pros and cons, but usually salaried positions are more secure.

Regardless of how you’re paid, it can be helpful to keep your finances in order by using a budget planner app, complete with a debt payoff planner to help you get ahead.

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FAQ

Is it better to be paid a salary or an hourly rate?

Generally, salaried positions are often seen as more prestigious and can offer more job security and benefits. Many workers feel it’s better to be paid a salary because one receives a predictable paycheck, but it ultimately depends on the position and the employee’s personal preferences.

What is the advantage of salary pay?

The biggest and most obvious advantage of salary pay is that you have a fixed paycheck coming your way no matter how much (or little) you worked during a given time period. Of course, that can be a disadvantage, too, if you regularly work more than 40 hours per week. It also may be easier to budget with a fixed, salaried income.

What are the budget challenges of being a salaried employee?

Salaried employees are, in a sense, on a fixed income; they’re earning the same amount all through the year, and can’t go for a bigger paycheck by working overtime. If they don’t receive a raise annually, they may see their effective pay decline due to inflation, which can end up straining their budgets.

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