Have you ever wondered what determines whether an employee should be committed to hourly wages or a fixed salary? The Fair Labor Standards Act (FLSA) answers this question concerning jobs based in the United States. The Act outlines two employment categories; namely exempt and nonexempt.

Employees falling in the former category are paid a fixed salary irrespective of the amount of work they perform. Nonexempt employees, on the other hand, are paid for every extra hour worked over and beyond the standard working time; i.e., 40 hours per week.

The classification criteria

Employees who receive a fixed salary and earn $684 or more per week fall in the “exempt” category. They are required to exhibit decision-making ability and independent judgment in at least 50% of job-related matters. An example of those working at such positions would-be managers who usually put in additional effort to ensure timely completion of projects but are not paid any overtime.

Fixed salary vs. hourly pay Source: investopedia.com

Understandably, those who do not classify as “exempt” automatically fall into the “non-exempt” category. Since the criteria are established by FLSA and not the employers, employees do not have the option of negotiating which mode of payment should apply to them.

Salary and hourly wages explained in detail

Salaried employees receive the same amount of money every pay period. Thus, they are committed to an annual wage at the time of hiring which remains constant until and unless the employment terms change or the employee switches to another job.

A drawback of this payment method is that employees must complete their tasks even if it requires them to put in extra hours or work on weekends, thus significantly impacting their work-life balance. A positive aspect is that a fixed salary offers greater financial security because even when the firm goes through tough times, a reduction is quite unlikely.

Fixed salary vs. hourly pay Source: coverfox.com

Hourly wages, as the name explains, pay workers for every hour worked. Hence, if an employee is made to put in additional hours, s/he will be compensated for them. Overtime pay is one and a half times more than the amount which a worker is paid for each hour during the standard working period.

Some employers may even pay double the normal hourly wages if they require staff to work during holidays, however, there is no such compulsion on them by law.

A benefit that comes with hourly pay is that you can take home additional income if you put in the extra effort. Also, you will be better able to divide your time between work and family responsibilities. On the other hand, a drawback is that when the employer faces financial difficulty, their instantaneous response is reducing the working hours of hourly employees, to cut down on their expenses.

Bottom line

Hourly wages and fixed salary both have their own set of advantages and disadvantages. However, in the longer run, the latter is more beneficial because they promise greater financial security which is much-needed in uncertain times. Also, they are often accompanied by various employee benefits such as retirement plans, health insurance, and paid leaves.