Hourly vs. Salaried Pay: Watch out!

February 11, 2020

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I hear a lot of misconceptions about hourly versus salaried employees, let’s clear up some of these areas. I’ll preface this by saying I am not a human resources professional. You’ll always want to consult with a human resources professional when making these kinds of decisions to make sure that you’re fully compliant as there are a lot of consequences if you do something wrong.

There are a lot of misconceptions about hourly versus salaried pay. Salary does not mean that you don’t have to pay the employee overtime anymore, so if you have an employee who is working 50 or 60 hours a week, I’ll often hear employers say, “well, I think I should make them salary so I don’t have to pay that time and a half for overtime.” That is not correct.

Many get confused by the difference between hourly and salary and exempt versus non-exempt. Exempt positions do not need to be paid overtime. Exempt positions include a professional designation such as employees who are engineers, accountants, or lawyers licensed in their profession. There are some other examples of what can meet the exempt status in the Department of Labor rules. However, again, I recommend highly that you consult an HR, professional to clarify these positions.

If you do not fall into one of the categories above, salaried employees who are paid less than $684 per week are eligible for overtime.  That equates to $17.10 per hour or $34,884 per year.  You can review the details at the Department of Labor website.

Exempt means they’re exempt from overtime and you don’t have to pay time and a half for hours over 40 per week. Non-exempt positions, however, whether they are hourly or salaried, must be paid overtime at the time and a half.  If you have a salaried employee who makes $30,000 a year who work 40 hours every week, you’ll be paying them $30,000 a year.

But, if they work overtime, you’re going to need to calculate an hourly rate and pay them at time and a half just like you would an hourly employee. There is no benefit. You’re not going to avoid paying overtime to a salaried employee who is non-exempt.

I strongly suggest keeping everybody at an hourly rate unless you have an exempt position. Keep that in mind when you’re making your hiring decisions and when you’re deciding on hourly versus salary.  If in doubt, speak with an HR professional and clarify your positions before there’s a problem.

Updated: 01/24/2021

Donna Bordeaux, CPA with Calculated Moves

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