This is a tough question for any small business owner.
What is the best way to pay your employees? Should you pay them hourly or would putting everyone on a salary be better?
Small business proprietors can find the issue of payment perplexing. If you are a business owner, you must make this fundamental decision with every new employee or position. Hiring employees raises various questions that go beyond their expense.
While you might find it easy to compute the dollar cost between an hourly and salaried employee, this should not be your sole reason for choosing how you will compensate your staff.
Understanding the drawbacks and benefits of paying hourly wages or salaries can help you make the appropriate decision for your business.
Salaried vs. Hourly Employees
Salaried employees receive a fixed yearly compensation irrespective of the number of hours they put in. Offering a salary helps you draw skilled workers who gravitate towards jobs with higher benefits and pay.
Conversely, hourly workers receive payment depending on the number of hours they work. Hourly payments are predetermined with varied amounts for overtime, holiday, and weekend hours worked, depending on your labor agreements.
BENEFITS OF A SALARY
A higher degree of flexibility is possible when developing a work schedule since salaried workers receive a fixed amount irrespective of the hours worked. You can schedule a salaried employee for more or fewer hours as necessary because he or she is exempt from overtime pay.
For the employee, he or she won’t suffer a decrease in his or her weekly pay if he or she misses a day of work.
Numerous employers provide additional benefits to salaried employees. These benefits include insurance, sick leave, and paid holidays. Companies may also offer commission fees and performance-based bonuses as incentive payments in addition to promoting increased productivity or sales.
Drawbacks of a Salary
1. No Overtime
One of the major disadvantages of an annual salary is the lack of overtime. Although salaried employees might often work over 40 hours per week, their paycheck remains constant.
2. Pay Cuts
During tough financial times, or throughout periods of reduced revenue for a business, the company might need to decrease some expenses in order to save money. Employee salaries are frequently one of the expenditures to face the cut.
Furthermore, companies expect workers to put in the same hours in spite of taking a pay cut. Although a pay cut is frequently better than losing your job, it’s still disadvantageous to face a cut while your workload remains the same.
Benefits of Hourly Wages
1. Working Overtime and Holidays
Hourly employees enjoy the benefits that come with working overtime and during the holidays. This frequently means earning more than usual. Some companies may offer holiday bonuses, for instance additional hourly wages during the weekends or holidays.
The major benefit of paying employees on an hourly basis is that you have flexibility with the time worked and workers’ hours. If your business is not performing as well as you’d hoped, you can decrease somebody’s pay and hours.
Hourly workers are also more likely to be part-time employees. This gives employers some latitude in how they compose the employee’s calendar. Furthermore, if a worker needs some time off on a workday to attend to personal matters, you don’t have to worry about losing money on unfinished work.
Therefore, hourly wages allow you as a business owner to save money when your employees take some time off.
Drawbacks of Hourly Wages
Hourly employees have varying paychecks owing to varying schedules. Although numerous hourly positions have a set 40-hour schedule, if your position doesn’t allow this, budgeting can be difficult. Furthermore, some hourly jobs are dependent on demand or season, making them unreliable as sources of income.
One of the disadvantages of hourly wages is that workers constantly have to trade time for payment. If your employer decreases your hours, this could decrease your income considerably. Furthermore, if you have to miss a day’s work or arrive late, you may miss payment; this makes it hard to pay bills when unexpected matters arise outside work.
In closing, when determining whether you should pay your workers a salary or hourly wages, it’s best you examine the type of work that your workers will perform. Since payroll forms a huge part of a business’s accounting, it’s worth consulting a financial expert if necessary to ensure you make the best decision.