Whether to pay an employee an hourly rate or a set salary is decision for business owners and hiring managers across the U.S. There are strict rules to follow when determining whether an employee is salary or hourly. Salary employees are generally exempt from Fair Labor Standards Act requirements, while hourly workers are nonexempt, and thus protected by FLSA. Each type of employee must meet certain requirements to be classified into their individual categories.
The Fair Labor Standards Act is the federal law governing wages, hours, pay equality and child labor standards. The purpose of FLSA is to protect the rights of American workers and ensure they are not exploited by employers through unfair work practices related to the areas of employment covered by this law. FLSA law generally applies only to nonexempt employees; exempt workers are commonly paid at a much higher wage than nonexempt employees.
The day-to-day duties performed by the worker are one determinant of whether an employee should be exempt or nonexempt, salary or hourly. Duties generally performed by hourly, nonexempt workers include such responsibilities as bookkeeping, operating machinery, sweeping floors, delivering pizzas and preparing food. The hourly employee is almost always overseen by a supervisor in their day-to-day activities. Exempt, salaried employees are often, though not always, supervisors of others, and their duties always include some degree of decision-making power involving judgment and discretion. They may make financial decisions, hire, fire and schedule other workers and formulate policies and procedures.
Wages and Hours
Nonexempt or hourly employees are protected by FLSA in regards to wages and hours. FLSA establishes a federal minimum wage that hourly workers must be paid. Hourly workers must also be paid an overtime rate of at least 1 1/2 times the worker's normal hourly rate for all hours worked over 40 hours per week. Salary employees are generally exempt from FLSA and are paid a set salary no matter how many hours they work. They are not eligible for federally mandated overtime pay but also are generally compensated the same amount whether they work 20 hours a week or 60.
It is important to be proactive in maintaining compliance with FLSA laws. Not only can the federal laws change, but state and local laws regarding wages and hours for salary and hourly employees are often more strict than the FLSA requirements. You must carefully review the regulations for each and every employee when determining hourly or salary eligibility. Consider the actual duties performed by the worker as opposed to using the job description.