Salary vs. Hourly Pay: Understanding the Key Differences & Overtime

Most jobs in the United States are governed by the Fair Labor Standards Act (FLSA) and are categorized as either exempt or nonexempt. If you are nonexempt, you are owed overtime wages, which are 50% greater than your regular pay rate, for any hours beyond 40 worked during a single week. Exempt employees do not receive overtime pay.

Key Takeaways

• Salaried employees receive a fixed wage, but they must keep up with their responsibilities and complete necessary tasks—even if that means working extra hours.
• Hourly employees must be paid time and a half for any hours beyond 40 worked during a week.
• In the U.S. the Fair Labor Standards Act determines whether or not employees can be paid a salary or must be paid hourly.

Salaried vs. Hourly Pay: An Overview

What makes you exempt? In general, an employee has to make at least $684 per week ($35,568 per year), be paid on a salary basis, and perform exempt duties that require discretion and independent judgment at least 50% of the time. If you take on managerial duties, for example, you’re probably exempt. This means you can be paid a salary, so 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 nonexempt. Regardless of job title, it’s the duties you perform that determine your job category. 

How Does a Salary Work?

When you earn a salary, each time your paycheck arrives, it’s for the same amount. An annual wage is a term of your employment, and that’s how much you will receive for as long as you hold the same job or until the terms are renegotiated. It is a type of implicit cost.

There can be a downside, though. While salaried employees receive a fixed rate of pay, they also have specific responsibilities and tasks that must be met or completed—even if that means longer hours and occasional weekends. In some circumstances this can make it more difficult to separate work and personal time.

A salary comes with an inherent sense of security. Employers can cut the hours of a nonexempt worker easily, but renegotiating a salary is more complicated.

How Does Hourly Pay Work?

As an hourly employee, you are paid for all of the hours you work. If an employer wants more of your time, they have 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.

There’s also a lifestyle aspect. In general, hourly employees will find it easier to separate home and work. Once work is over for the day, they 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 easier for an employer to knock off some of your hours until business improves than to eliminate an entire salaried position. Hourly employees protected by a union may be protected against some of these risks.

There also are possible effects on eligibility for healthcare coverage. Businesses with 50 or more employees are required to provide healthcare to full-time employees, who are defined as people working 30 or more hours, so some businesses keep hourly employees to fewer than 30 hours to avoid the mandate.

Salary vs. Hourly: Key Differences  Salary Hourly  Guaranteed weekly wage Pay varies based on the hours you work  No overtime pay Overtime pay of time and a half for each hour worked after 40 hours Employer-sponsored benefits such as healthcare coverage and paid vacation and sick days May be responsible for own health insurance and not paid except when working Harder to separate work from personal time Can leave work behind when not on the job Salary comes with a sense of job security Employers can more easily cut your hours when they choose to

The Bottom Line

There are pros and cons to being hourly versus a salaried employee, but for the most part the latter enjoy more benefits, such as paid vacation and sick days, retirement accounts, and other employer-sponsored benefits. Hourly workers do not usually receive compensation in the form of paid leave by the companies who hire them and may be responsible for their own healthcare. On the other hand, hourly employees enjoy more autonomy and may be able to set their own hours.