The great debate in employment law continues to heat up with proposed changes on mandatory minimum wages and mandatory weekly pay rates for employees drawing a salary. If you are new to the business, you may not be so sure about the ins and outs of the salary vs. hourly pay debate. Some small business owners may not even realize that there are federal guidelines for salaried vs. hourly employees.
Thankfully, we have compiled a comprehensive guide to keep you informed on the current employment laws. Read our treatise below to help you decide on whether you would like to build a workforce of salaried, part-time salaried, hourly, temp, digital nomads, or economy workers in a third-world country.
Table of Contents
What Are the Attributes of an Hourly Worker?
An hourly worker is someone who typically has to use a timesheet or punch card to clock in and out of the job. Although they are legally entitled to justifiable 5 or 20-minute breaks without docking their pay, they will have to punch out for lunch breaks. They also may fit the following criteria:
- Part-time workers who work less than 40 hours a week
- Full-time workers who work 40 hours or more a week
- Receive mandatory minimum wage or higher
- Hours are limited by their employer each day
What Are the Attributes of a Salaried Worker?
A salaried worker receives an annual payment sum that is apportioned over fractional pay periods that normally schedule a paycheck every week or two. The amount and frequency of payments are strictly construed by the employment contract. Salaried workers are expected to complete any tasks assigned to them even if they exceed 40 hours in a workweek.
The majority of salaried workers are in managerial or professional positions that are exempt from overtime. This means that they may be on call at any hour to show up for work and are contractually bound to abide by their employer’s demands. The benefits of taking a salaried position may be 401k benefits, full healthcare coverage, and paid time off. They also may fit the following criteria:
- No punch cards or timesheets required
- Works a desk job or professional occupation
- May fill in for other employees in a pinch
- May have the ability to fire and hire other employees
What Are So-Called Flat-Rate Employees?
Flat-rate employees are those who work according to real-time labor guides. These guidelines may create hypothetical fractional hours or hours that a particular job should normally be completed within. Flat-rate employees mostly work in trades such as appliance or automotive repair. Nevertheless, flat rates are essentially the bedrock of the managed health care industry, as well, because insurers only pay a flat rate per visit, diagnostic, treatment, procedure, etc.
In some industries, a salaried worker will still have their work gauged by flat-rate hours even though they do not have any ultimate effect on their salary. This means that a mechanic who collects a salary will still be judged by how much work he did compared to other mechanics who work for an hourly wage.
If an oil change pays .5 hours and the flat-rate employee completed 20 oil changes in an 8-hour workday to get a one-hour bonus, he has proven his hourly value to the company. Whereas, a shop foreman who earns $100,000 a year may be expected to complete the same volume in flat-rate hours and must also ensure that his team is producing an impeccable quality and volume of labor.
The limitations of flat-rate employment are obvious. If the worker does not meet the gauge created by labor guides, he may not meet the minimum wage. In this case, the employer would still be required to pay the employee his standard hourly wage. The incentive program of flat rates conversely creates an incentive for employers to renegotiate hourly pay or fire employees who fail to meet flat-rate volume quotas over time. The same philosophy may be applicable to salaried workers.
Complying with the Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) has defined the critical differences between exempt and non-exempt workers:
- A non-exempt worker is not exempt from receiving overtime wages if they work more than 40 hours a week. An hourly rate of 1.5 X is standard overtime pay. Holidays normally command double the hourly rate (2 X).
- On the other hand, an exempt worker can be contractually bound to work more than 40 hours a week without additional pay.
A worker who is non-exempt from collecting overtime pay can be a great liability to any company’s payroll budget. For this reason, many employers will seek to fill overtime worker positions with expendable part-time workers.
This has the additional benefit of helping an employer cut mandatory Obamacare health insurance costs. And, in fact, many employers now have reduced the hours of all employees to less than 30 hours a week and 130 hours (on average) a month to dodge the mandates of the Obama-Era Affordable Care Act legislation.
At times, an employer may create positions for exempt employees. These exempt employees collect the same annual salary, no matter how many hours they actually work in a week or year.
However, in order to create exempt employee positions to avoid overtime regulations, employees must meet strict criteria. An employer who misclassifies exempt and nonexempt employees can face steep penalties. There are only three categories of exempt salaried workers recognized by the FLSA:
- Executives – In order to qualify as an executive, the employee must be a manager who acts as the CEO (Chief Executive Officer) or an executive officer who manages a distinguishable subdivision or department of the company. In addition to managerial status, the head must have power or key influence to terminate and hire employees and direct the occupational function of at least two employees.
- Professionals – In order to qualify as a professional, the employee must possess special skills in a study of science or possess advanced knowledge in specialized fields such as engineering, teaching, or even analytics such as accounting.
- Administrative Positions – These are desk jobs of employees who help manage employees or general aspects of the business. There is no manual labor involved. Administrators may also be called paper-pushers.
In order to qualify for FLSA exemption, these workers must also earn more than $455 per week, be paid for every week worked, and draw a steady salary regardless of actual hours. An employer may be wise to offer these employees paid vacations during slow seasons to retain them if they are highly skilled and difficult to replace.
Some State Laws Surpass the Federal Standards
Now that you have a basic skeleton of the Federal guidelines, you should still be wary of state laws. We still live in a bifurcated system of government with hundreds of thousands of Federal regulations that are equally applicable in each state as a state’s own laws. Yet, some states have stricter labor laws regarding overtime and mandatory healthcare obligations of employers.
You should carry out your research on websites like FindLaw to ensure compliance with state laws. Be sure to pay closer attention if you live in the following states:
- California requires overtime pay after 8 hours in any single day and double pay after 12 hours.
- Alaska requires overtime pay after 8 hours but only in commerce and manufacturing jobs.
- Nevada requires overtime after 8 hours, also, but only in workers who earn less than minimum wage but receive health benefits.
- Colorado requires overtime pay when workers exceed 12 hours in a day.
What Are the Employer Advantages of Hiring Salary Vs. Hourly Employees?
When the philosophical debate grows a face, salary vs. hourly wage can be a lot more complicated than it would first appear. A company that is focused on reducing payroll costs may find itself stuck paying off salaried employees who do not earn their keep by working a full 40 hours a week. This typically happens when an employer hits a slump during slow seasons or even sporadic times of the year.
Although part-time salaried workers may be good for a business that has predictable peak and off-seasons, few businesses have predictable volumes of business every season. For this reason, the flexibility of hiring hourly workers and temp workers when there is an over flux makes sense.
For example, shipping companies and other large retailers such as Amazon and UPS typically require a lot of temp workers during the Christmas holidays to meet consumer demands. Then, they fall into a rut immediately after their peak seasons in January and February when buyer’s remorse sets in.
There are now online companies that specialize in connecting companies with qualified temporary workers. Finding staffing platforms to quickly fill positions will also allow a company to overhire and retain only the best workers who prove their skills and dedication.
How Does the Minimum Wage Factor Factor in?
The Federal minimum wage is still $7.25 an hour. In many states, that figure has been raised well above the Federal guidelines. In Washington, for example, the minimum wage is currently $12.00 an hour and set to increase to $13.50 in 2020 with cost-of-living adjustments to follow every subsequent year.
The current law requires salaried workers to earn at least $455 a week or $23,660 a year. An Obama-era directive sought to increase that figure to $913 a week and $47,476 a year. The December 1, 2016 mandate was struck down, however, by a Texas judge. But this does not mean that the salary minimums will remain stagnant. The Department of Labor (DOL) is strategizing a progressive approach in raising these federal minimums as the economic climate allows.
Their new proposal would officially nullify the $913 increase and sanction a $679 per week and $35,308 minimum. Nevertheless, this change would only be applicable to FLSA exempt status white-collar salary rule for professionals, administrators, and executives.
This recent announcement should be monitored closely by all businesses that are considering salary to fill large roles in their corporations. It is scheduled to become effective in 2020. This will force employers to reorganize their payroll and renegotiate labor contracts.
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The Employee’s Perspective of Salary vs. Hourly Wages
The benefits of salary vs. hourly wages are all very situational. The biggest lure for salary work is that a minimal standard of living is guaranteed. When it comes to hourly wages, employers tend to over-hire and may force employees to compete for job retention. When the stress is too high and employees feel expendable, they may not provide their best work to the company.
For example, in the case of an automotive repair shop, workers who are being pressured to make book-rate quotas may avoid suggesting other repairs or spending a lot of time on any one customer’s car because it simply doesn’t pay.
The quality is exchanged for a formulaic measure of worthiness. This formulaic measure of worthiness is judged by unrealistic standards that can have many mechanics feeling like they are always walking on thin ice.
As a result, they may rush to complete an oil change and inadvertently forget to refill the engine. They may become a greater liability by rushing to put a car up on a lift and not properly set it on its lift points. They may scratch the paint or avoid addressing obvious running problems. Their incentive to do the bare minimum to make time, even when the book hours are unrealistic, can do more harm than good.
A salaried employee in the same situation may be able to convince his manager that he can provide quality assurance. This will guarantee return business and the pinnacle of customer satisfaction because the job is always done right the first time. Customers may feel more comfortable investing in a vehicle at a dealership if they know that they won’t have mechanics playing games with them and defrauding them to pay the bills.
In this respect, a dealership could reduce its advertising costs and rely on word-of-mouth advertising to grow its volume. Drivers would come from far and wide to receive a higher quality of service that earns their trust with transparency and fair business practices.
A dealership that is gauging its success each day by how many flat-rate hours it can charge for maintenance and warranty work may find itself deluded about why its customer base continues to thin each season.
Customers may not disclose that they had a bad experience or that they don’t trust the mechanics but will, nevertheless, spread negative parlor press and avoid shopping at the dealership again.
Employees who are being forced to work part-time and to compete with an overflux of other workers may not have confidence in building a career at the company. This means that any valuable wisdom that they acquire through experience will inevitably be lost. The company will always have an influx of new recruits who present liability and reduce the efficiency of the business.
When you pay employees a salary and give them supreme power to terminate or hire other workers, they may start to take their jobs more seriously. They may see a sustainable long-term future in their employment. This can foster creativity and build managerial wisdom over time. When the company is streamlined and has a wise overseer at the helm, the daily grind for all the employees is a lot softer.
However, a salaried position must be granted as a matter of privilege rather than economics. When employees are given a salary job, the extra overtime that they work without receiving additional compensation should mean that the job requires less stressful day-to-day demands and hard work.
Someone who is drawing a salary is only respected if the position they hold is coveted. This means that it should have additional pay, healthcare, bonuses, and 401k benefits. It is usually unwise to offer salaried positions to anyone under the age of 26 because employees this age may not value the healthcare aspect. Most of these young employees still benefit from parental health insurance and might not see healthcare as an incentive to work any harder.
Hourly wages may be the right fit for many workers who want flexibility. This is especially true with young part-time workers who have other obligations like school. A part-time job with a certain and fixed hourly pay may be all that they are ready to do.
Some may hold multiple part-time jobs to keep things interesting, especially when they do not have a clear career choice yet. Playing the role of holding several different positions at once may help them to build a better resume of diversity for potential employers when they have sufficient training to qualify for a higher-paying position.
Although hourly employees are non-exempt from overtime, most employers can eliminate this drain on their wallets by overhiring and limiting employee schedules to no more than 40 hours in a workweek. The same can be done with salary workers but may overlook the benefits of maximizing your workforce.
What Are the Other Complexities of Staffing a Quality Workforce?
When it comes down to it, there are a variety of factors that are more important in building a quality workforce than payroll deduction. When you look at successful corporations, they all offer different virtues that make it easy for them to hire and retain a quality labor force.
Fast food restaurants can maintain a high turnover rate without problems because they simplify their production lines. Using assembly-line methods and creating McJobs that anyone can learn a role in very easily are the secrets to running a successful business.
Business owners should always look at the turn-key value of their business rather than considering, subjectively, what it is worth when they are involved. The turn-key resale value takes them out of the equation and examines how the systems of suppliers, workers, and customers are all filled to perpetuate the business plan.
This usually involves simplified processes for training and quality controls that eliminate the human equation. McDonald’s uses food that is prepared by large manufacturing plants under contract and quality controls of its own to eliminate the impact of human error at the retail level.
Of course, not every business can succeed as a franchise and rely on an overflux of young McJob workers to fill the workforce. If you are an entrepreneur who is invested in a niche business that requires talent and high-quality labor to compete with monopolies and franchises, you should focus on sourcing out talent above all else.
Finding employees who can act as business partners with their own complete autonomy to develop their contributions to the common enterprise is the better path to take. These employees would have the greatest incentive to improve the company because they would have a lot of capital and stock tied up in it themselves.
In the alternative, you can provide stock shares to your employees as an incentive to improve all aspects of the business if the employees are all professionals with a lot of autonomy. This type of plan seems to be particularly effective with pharmaceutical representatives who have a stronger incentive to sell the medical products instead of just going through the motions.
Professionals who are willing to accept a contractual role in building your business with a lot of flexibility may be best suited for salary positions. It may also be better for them to act as private contractors or business partners. The diversity of roles available for businesses to maximize the value of talented workers in hard-to-fill jobs may require some creativity of their own.
The Evolving Face of Businesses in the Digital Age
In the digital age, freelancing is becoming a sought-after method of employment. Employees like to be able to work their own hours. Although you may be able to pay the most talented workers on an hourly or salary-based pay schedule once they have demonstrated their value through privately contracted work, most workers would rather retain the flexibility of freelancing unless the benefits were tremendous.
Creating jobs that pay workers to work on their own schedule using a computer in a mobile or remote capacity can attract interest in your company. This also allows you to reduce wages because you can effectively outsource the work to digital nomads who travel and work predominantly overseas.
Because the cost of living is far less in many other countries around the world, you may find talented individuals who produce high-quality work at 50 or 30 percent what they would be willing to settle for if their jobs required them to live exclusively in the United States.
For this reason, the aging paradigms of hourly and salary-based work are fading. Some workers would not trade their mobility for any amount of salary or pay raise in the world if they would be eternally stuck in one location where the cost of living eats up all their wages.
Although there are some people who enjoy the American lifestyle and would rather stay situated in one region, these are usually people who simply don’t feel comfortable traveling a lot. For some, having the flexibility to choose can be far more important than the wages actually paid.
And because there are ways around minimum wages and minimum salaries when you set up your business for mobile freelancers and independent contractors to participate, it is easier to pay for results. The alternative may be creating the appearance of a large and successful company by having stand-in positions that are inefficient, a bloated bureaucracy of paper-pushers, and empty chairs.
Goldbricking is becoming more and more common in businesses as employees see that an employer is not able to retain quality talent at the pay level. When the talented workers become fixtures in the corporation, they can look for any excuse to take a break and to do the bare minimum to keep their employers happy.
There are a lot of factors to consider in building your workforce when you consider all the complexities of the laws and the ability to obtain workers without even hiring them. Taking advantage of staffing platforms to overfill jobs so that you can beta-test them and find the most qualified candidates can be tempting. However, workers who are forced to compete and feel expendable may not take their jobs seriously and provide their best work.
Although salary can have its advantages, employers should be careful to consider whether they have enough steady work and need for overtime-exempt workers. It is a lot easier to limit the hours of hourly workers to reduce the drain of writing checks for excessive overtime.
In any regard, all employers should focus on building turn-key businesses that have streamlined systems. Turn-key systems can be replicated and turned into expansive franchise operations if desired. If a business is not growing, it is shrinking. The health of a business can only be gauged by explosive growth that demonstrates high-profit margins and niche value in a capitalistic system. Start reading the laws and exploring your staffing options today!
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