All employees must be classified as either hourly or salaried. Hourly employees are protected by federal and state overtime and break regulations, whereas salaried employees are not. Salaried employees require less recordkeeping and easier budgeting for employers, but the hourly classification makes more sense for part-time workers.
Hourly employees, also referred to as nonexempt employees, are paid for each hour of work for the company. As nonexempt employees, they are protected by the overtime regulations in the Fair Labor Standards Act. This federal act requires that employers pay employees an overtime rate of one-and-a-half times their regular compensation rates for hours worked in excess of 40 hours a week.
Employers must also abide by state-level overtime and break regulations for nonexempt employees. These regulations vary on a state-by-state basis and are often more stringent than the federal rules. For example, California requires employers to provide paid and unpaid rest breaks and compensation for overtime after eight hours a day in addition to 40 hours a week.
Salaried employees are exempt from overtime and break regulations. Rather than being paid by the hour, salaried employees are paid the same basic rate regardless of how much they work. That means a salaried employee could work 30 hours one week and 50 hours the next week and receive the same pay.
Only certain employees can be considered salaried and exempt. To be exempt, the employee must typically handle non-manual work that involves independent decision making. He also must be a professional like an attorney, accountant, doctor, teacher, actor or engineer; an administrative worker, a salesperson or an executive. Lastly, his salary must exceed the minimum salary set by the Fair Labor Standards Act, which is $455 per week as of publication.
Pros and Cons of Each
Salaried employees are paid the same basic rate every month, so it's easier for employers to budget payroll. The salaried designation can also be beneficial for the employer in seasonal businesses because the company can avoid paying overtime rates during busy times. In addition, employers don't have to track the hours of salaried professionals or worry about compliance with break regulations. However, since regulations demand a higher pay rate for salaried workers, the hourly designation may make more sense if an employee doesn't ever need to work more than 40 hours a week.
Health Insurance Benefits
The Affordable Care Act requires that most employers provide health insurance coverage for full-time employees. The IRS considers a full-time employee to be one that works at least 30 hours a week. Both hourly and salaried employees are full-time if they work more than 30 hours a week, regardless of the designation. However, an employer doesn't have to offer benefits to part-time, hourly employees. An employer may be able to prove that a salaried employee works less than 30 hours a week, but he'll have to track exact hours over the year to tell for sure.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.