Hourly to Salary: The Pros and Cons of Making the Switch

For many businesses, the number one concern is employee compensation and whether or not to change from hourly to salary.

Hourly employees are paid for the number of hours they work, while those on a salary basis are paid a fixed amount regardless of the hours worked. The debate rages on with no clear winner at this point.

In 2021, close to 56% of all workers aged 16 or older in the United States were paid at hourly rates. While you may think that is all minimum-wage employees, it’s not: only 1.4% of all hourly paid workers were at or below the federal minimum.

That is vastly different than the 13.4% in 1979 and shows a stable trend of workers accepting hourly compensation for higher-paying jobs.

But is it right for your business? Should you make the switch, and change your workforce into salaried employees?

Below, we’ll examine:

• What is the difference between hourly and salary
• The pros of switching from hourly to salary
• The cons of switching from hourly to salary
• The process of hourly to salary conversion

Get your timesheets out, and let’s dive in!

What is the difference between hourly and salary?

Hourly employees are paid for the number of hours they work, while those on a salary basis are paid a fixed amount regardless of the hours worked. Salary employees are also exempt from overtime pay, which is not the case with hourly employees.

For example, if an hourly employee works 40 hours in a week, they will be paid for those 40 hours. However, if a salaried employee works 50 hours in a week, they will still only be paid their salary, normally based on a 40-hour week (or a similar equivalent) even though they worked 10 hours more than the hourly employee.

Pros of switching from hourly to salary

As a business owner, you may be struggling with this decision. Adding salaried employees can be a daunting idea, filled with unknowns. But, there are some definite pros to making the switch.

Increased productivity and consistency

When employees know that they aren’t going to be paid for any extra hours, they often naturally increase their productivity to get the job done on time. Feet-dragging can be a real problem when you have hourly employees, looking to stretch tasks out and claim some high-paying overtime.

Reduced turnover

With an agreed-upon salary that they have negotiated, employees may feel less pressure to look for a new opportunity and more connected to the business they are currently at. When it is just a list of hours that changes every week, they may look for something more stable somewhere else.

Improved morale

Employees who feel appreciated are more likely to be happy and productive at work. When you switch to a salary-based system, employees know that they are valued and their hard work is appreciated. This can lead to improved morale and a more positive work environment.

Increased flexibility

With a salary-based system, employees can decide when to take time off when necessary without fear of lost wages or repercussions. Paid time-off has been negotiated into the contract, meaning they know when and how much they can take.

Hourly employees, on the other hand, may end up needing time off in case of an emergency, only to have to work harder the following week to make up for the time they missed. This can lead to burnout and decreased employee wellbeing.

Increased loyalty

Employees who are paid a salary are more likely to feel loyal to their company. They feel as though they are part of the overall process, instead of just a budget line that is added at the end of the week.

Tax savings

Salary employees are (usually) exempt from overtime pay, which can lead to tax savings for the business. Hourly employees are not exempt from overtime pay, so businesses that have a large number of hourly employees may end up paying out more in taxes than they would if those employees were on salary.

Increased efficiency

With a salary-based system, you know exactly how much each employee is costing you per hour. This can help you to be more efficient with your budget and make better decisions about where to allocate your funds.

Reduced administrative burden

When you switch to a salary-based system, there is less paperwork and administrative work involved. You simply need to make sure the work is getting done, and pay them their fixed salary amount regardless of how many hours they have logged.

Increased competitiveness

A salary-based system can help you to stay competitive in the job market, by offering a distinct number to attract new talent. Hourly rates can look enticing but the established job-seeker may be put off by the uncertainty.

Improved compliance

With a salary-based system, businesses are more likely to comply with labor laws and regulations. Hourly employees are often subject to overtime pay, which can be costly, or even lead to legal disputes for businesses if not properly tracked and managed.

There are additional benefits for going from hourly to salary but these are some of the most common. That doesn’t mean it’s all roses though, there are challenges to face as well.

Cons of switching from hourly to salary

At first glance, it may seem like an easy decision for any business owner to make, moving their employees to salaried positions. But it’s not so simple, and for many, including companies both big and small, it can have severe ramifications.

No time tracking

When employees are on salary, there is no need to track their hours worked. This can be a huge issue for businesses that want to keep detailed records of work, productivity, and efficiency.

Lack of immediacy

If you need a job completed as soon as possible, you have the option of paying hourly workers overtime or calling them in for extra shifts. This may not be possible with a salaried employee, who has built a schedule around the specific times that were agreed to.

Morale issues

While it may increase the morale of the employee that makes the switch, for any hourly workers left behind, it could have the opposite effect. They could foster resentment or feel as though they aren’t valued as highly as their salaried counterparts.

Unionization

For some companies, the threat of unionization is one that they wish to avoid. Switching an entire workforce to salary can lead to collective contract negotiations and disputes.

Harder to fire

Along those lines, a salaried employee can often be more difficult and costly to fire, as they will have severance guidelines built into the contract and labor laws.

Increased benefits

Often, businesses are required to provide additional benefit packages to salaried employees. Even if they are not forced by regulatory bodies, these may be expectations from any new job-seekers, leading to a limited prospect pool if a company decides not to offer them.

For some businesses, the number of cons will simply outweigh the benefits and mean switching from hourly to salary isn’t worth it.

Hourly to salary conversion

If you have decided to make the switch, you might be wondering how to get started. Luckily, we have a handy step-by-step guide for going from hourly to salary with your business:

1. Research the market

The first step is to do your research and see what the going salary rates are for your industry. This will help you set a fair salary for your employees and ensure that you are not paying too much or too little.

2. Determine the job responsibilities

Once you have an idea of the market rate, you need to determine the specific job responsibilities and duties that will be included in the new salary. This will help you ensure that the employee is being fairly compensated for their work.

3. Create a job description

Next, create a job description that outlines the specific responsibilities and duties of the position. This will help both you and the employee understand what is expected of them in their new role.

4. Set the salary

Finally, set the salary for the position. This should be based on both the market rate and the job responsibilities and duties outlined in the job description. You should also be sure to consider any overtime they might be asked to do and compensate them for it in your offer.

5. Notify employees

Once you have set the new salary, it is time to notify your employees of the change. Be sure to explain why you are making the switch and what it means for them.

6. Update payroll systems

The final step is to update your payroll systems to reflect the new salary rates for your employees.

7. Monitor changes to the budget

Finally, be sure to monitor any changes to your budget that may occur as a result of the salary change, and continue to evaluate whether the change was a successful one.

By following these simple steps, you can make the switch from hourly to salary without any drama. Be sure to carefully examine your own business, the workers you would be switching, and other market factors to decide whether it is the right path to take.

Remember, there is always the option of going the other way too! You’ll have to learn how to calculate salary to hourly, but for some of the same reasons, it could be the right choice for your business.