Salary vs. Hourly: How Benefits and Laws Differ

Often, holding a steady job is more important than the particulars of how you’re paid. But what if you were offered a higher-level job that would take you from an hourly worker to a salaried employee? Your first instinct would likely be to yell a resounding “Yes!” since it probably comes with a nice pay raise.

Before you give your boss a big hug, think through the decision and consider the pros and cons of becoming salaried. Depending on the size of the raise, would you really end up taking home more money? And do you wonder whether you should be getting extra pay when you work overtime? Read on for answers. (For related reading, see: Employment Negotiations: What to Ask For & How.)

Your Current Job: Exempt or Nonexempt?

Most jobs in the United States are governed by the Fair Labor Standards Act (FLSA). As with most laws, it’s a bit complicated, but here’s what you need to know to answer the overtime question. 

If your job is covered by the FLSA, it is either exempt or nonexempt. If you’re nonexempt, you are currently owed overtime wages (time and one-half your regular rate if you work more than 40 hours in a single workweek). Exempt employees do not receive overtime pay.

These rules could change. In May 2016, the U.S. House of Representatives passed a law that could exchange overtime pay for compensatory time (see House Votes on Bill to Change Overtime Pay Rules). The bill is now in the Senate.

What makes you exempt? In general, an employee has to make at least $455 per week ($23,660/year), be paid on a salary basis and perform exempt duties to be considered exempt. If you take on managerial duties, for example, you’re probably exempt – meaning that no matter how many hours you work, your employer doesn’t have to pay you overtime wages. 

Because of the FLSA, you can't negotiate whether a job is exempt or non exempt. Regardless of job title, it's the duties you perform that determine your job category. (For related reading, see: 7 Tips for Getting the Salary You Deserve.)

In May 2016, new rules released by the Department of Labor (DOL) more than doubled the salary threshold for exempt employees to $47,476 and made other changes. The revised rules were blocked by a Texas court ruling on November 22, 2016, and they are still in limbo (see Overtime Pay Rule Delayed). It's not clear whether the Trump administration will defend the revised rules, drop the DOL appeal to the Texas court decision, or restart and rewrite a new set of regulations. 

Reasons to Love Hourly Pay (for Now)

If you have an hourly position, you already know the answer. As an hourly employee, you are paid for all (or most) of the hours you work. If the employer wants more of your time, it has to pay you more. Legal overtime is time and a half; some employers may pay double time for holidays, but that isn't mandatory unless it's part of a contract that covers your job. If you're in a well-compensated field with lots of overtime, you could bring home more than if you earned the same official pay on a salaried basis.

Then there's the lifestyle aspect. In general, hourly employees will find it easier to separate home and work. Once work is over for the day, you can concentrate on family, hobbies or a second job.

Unfortunately, being paid hourly also makes you more vulnerable. When laws change or the company goes through tough times, hourly employees often feel the impact first. It’s easy for an employer to knock off some of your hours until business improves.

There are also the possible effects of the healthcare coverage requirement: Because businesses with 50 or more employees are required to provide healthcare to people working 30 or more hours (the Affordable Care Act's definition of "full time"), some businesses have cut hourly employees to fewer than 30 hours to avoid the mandate.

A Salary's Feel-Good Factor

There’s no denying the comfort of a salary. Each time your paycheck arrives, it’s the same. You agreed to a monthly or yearly wage and, regardless of what happens (unless you are laid off or your job changes), that’s how much you receive.

A salary also comes with an inherent sense of security: An employer can cut hours easily, but renegotiating a salary is more complicated. Especially if you're employed full time, you are likely to receive not just healthcare benefits, but retirement contributions and paid vacation time. In recent years employers have cut back on perks, but even a scaled-back benefits package is better than none at all.

But don’t forget the downside. For starters, salaried employees generally have a more difficult time separating work and personal life. Employers may expect salaried employees to work after hours or extra hours during the day regardless of how many hours they amass in one week.

Healthcare laws still apply, but salaried employees are often considered exempt employees under the FLSA, which means there is no required overtime pay. (For more, see: 7 Easy Steps to Negotiating a Raise.)

The Bottom Line

Salaried positions may have more job security than hourly work, but that can come at a price. Many of the hours a salaried employee puts in go uncompensated. Hourly employees who are offered a salaried position may find that, although the job comes with more prestige, the compensation is the same or less because of the lack of overtime pay.

If you value leaving your job at work, an hourly position may be right for you. Make sure the job description is clearly laid out so you can make an informed decision about the position before you accept. (For more, see 8 Federal Laws That Protect Employees.)

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