The difference between hourly vs salary vs commission employees is in how you pay them.
- Salaried employee: Paid a regular fixed rate regardless of the number of hours worked for each pay period.
- Hourly employee: Paid a rate for each hour they worked for the period and is entitled to overtime pay if they work more than 40 hours in a week.
- Commission employee: Paid a percentage of sales made by the employee in lieu of an hourly rate or salary
Learn more about the different types of employees (salary vs hourly vs commission) below.
Hourly vs Salaried vs Commission Employee: Compared
How to Choose Salary vs Hourly vs Commission
The kind of workers you should employ depends on your business and how you plan to schedule your employees—flexibility is a big consideration. Service industries, such as retail and food, usually have hourly workers as the work schedule is rarely consistent. Whereas, firms with eight-hour workday schedules often hire salaried employees. Commission-based jobs, such as in insurance or certain types of retail sales, may or may not have set hours.
Salaried Employees
| PROS | CONS |
|---|---|
| You can budget your payroll for the year in advance | Possibly paying for work not completed (guaranteed salary instead of paying per hour) |
| Keeps your payroll expenses consistent | Tracking is still necessary for all nonexempt employees (hours worked, overtime, breaks, etc.) |
| Makes processing vacation and sick leaves easier (you don’t need to worry about calculating or paying overtime) | Salaried employees get paid vacation time |
| Employees can rely on a steady paycheck per period | |
Salaried employees are usually in professional positions like teaching, engineering, accounting, management, research, finance, or law. Aside from one-off deductions or pay adjustments, a salaried employee’s pay typically remains the same for each pay period. That’s why regardless of the quality and amount of time spent on work, employers cannot reduce the employee’s salary due to poor job performance, holidays, or a business closure for inclement weather days.
Benefits & Overtime for Salaried Employees
Since most companies do not have to offer overtime pay for their salaried workers, they may provide a range of benefits as an alternative. Most full-time salaried employees are offered paid vacations, health, dental, vision, 401(k), or even retirement plans. However, there are salaried, nonexempt workers who must be compensated by their employer for overtime work—if they exceed their 40 hours—as mandated by the FLSA—more on that below.
Exempt vs Non-exempt Salary Employees
An exempt employee is one who is not eligible for overtime and must meet certain criteria and salary thresholds. A non-exempt employee is one who must be paid overtime for all hours worked over 40 within a workweek.
Hourly rates for exempt salaried employees come to $21.51 an hour minimum—well over minimum wage. However, you may still want to pay some employees on salary, such as those that work a fixed number of hours under a fluctuating workweek, or for jobs that don’t warrant a higher pay rate. Low-level administrative employees might fit this description. However, even on salary, non-exempt employees must be paid time and a half for any time over 40 hours a week.
Per the Fair Labor Standards Act (FLSA), “If the exempt employee is ready, willing and able to work, an employer cannot make deductions from the exempt employee’s pay when no work is available.” However, there are a few exceptions (posted verbatim from the Department of Labor):
- When an employee is absent from work for one or more full days for personal reasons other than sickness or disability;
- For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness;
- To offset amounts employees receive as jury or witness fees, or for temporary military duty pay;
- For penalties imposed in good faith for infractions of safety rules of major significance;
- For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions;
- In the employee’s initial or terminal week of employment if the employee does not work the full week, or
- For unpaid leave taken by the employee under the Federal Family and Medical Leave Act.
Hourly Employees
| PROS | CONS |
|---|---|
| Beneficial for employers in hospitality, food, retail, and home care due to the flexibility in hours | Much more tracking involved—hours worked, paid breaks, unpaid breaks/lunch, overtime hours |
| Allows you to match your payroll expenses to the busy seasons when you’ll generate more income | You have to verify the hours reported on timecards and manage all the calculations—check out our time card calculator for an easier time |
| Employers pay for actual work performed and can save money by not providing a salary | Subject to local, state, or federal minimum wage, whichever is higher |
Hourly employees usually work in service industries, shift work jobs, or other jobs with fluctuating workweeks, like construction. They must be paid at least the federal minimum wage for each hour worked. They must also receive overtime pay of not less than one-and-a-half times their hourly rate for any hours worked beyond 40 each week. They usually use timecards or an automated tracking system to verify time worked. Full-time workers are defined as those who work 30 hours a week or 130 hours per month.
FLSA Laws on Hourly Employees
Hourly employees are also referred to as nonexempt employees under the supervision of the FLSA and its provisions. Most of these workers receive less than the minimum weekly salary of $884. (Note: Salaried employees can be classified as non-exempt, but hourly workers are always considered non-exempt.)
Federal law mandates a minimum wage of no less than $7.25 per hour, but many states and even some cities require a higher rate. Hourly workers usually don’t have the benefits like paid vacation, retirement plans, or even bonuses, although you do need to provide health care for any hourly worker who averages over 30 hours per week. Also, the government has guidelines for pay rates and break times that you often have to track.
Commission Employees
| PROS | CONS |
|---|---|
| Employees earn income based on their work completed | These positions tend to have a high turnover rate (ex., salespeople) |
| Incentivizes employees to work hard to earn the most they can—the more sales, the higher their pay | Since most commission-based employees are highly competitive, there can be issues in the workplace |
| Employees who earn commission have more flexibility—can be a big perk for those looking for a work/life balance | Can’t predict expenses; can be a problem if you pay commissions after purchase but receive payments over time |
While tips and bonuses can be considered commissions, commission-based jobs are usually in higher-end retail, like car sales or real estate, insurance or financial advisor, and advertising sales.
Commission compensation can bypass the hourly vs salary debate. Commission-based workers are compensated based on the revenue they generate for your business rather than a straight salary. However, you can also use it as an incentive for an hourly or salary position. You can also add benefits or treat them like 1099 contract workers. Their work structure can be based on individual or team performance.
Take note that employers are also required to withhold payroll and federal income taxes on commissions.
Types of Commission Structures
There are different types of commissions that you can include in your pay structure.
- Straight commission: The employee only receives a commission as pay. It includes no base salary or hourly pay rate because both the employer and employee set an agreed-upon percentage of sales. This is common practice in the real estate and automotive industry.
- Salary plus commission: In addition to a fixed but smaller salary, an employee also receives a commission for their sales or performance. It is the most stable commission-based structure and most common in the retail industry.
- Bonus commission: It is more of a reward for an employee’s or a team’s stellar sales performance. It is usually earned based on an individual’s or a team’s success in meeting preestablished earning quotas. It is a common practice among startup companies, as it motivates their employees.
- Variable commission: To break into expanding markets, some companies reward employees with commissions to jump-start sales in a specific market. The longer the contract or the bigger the sales, the higher the commission.
- Graduated commission: A company can set up commission levels according to the number of sales that the employees will try to achieve. The rate at which an employee earns depends on what commission level they have achieved.
- Residual commission: An employee can only start receiving a commission once a client purchases a product. They will continuously receive it on a sale as long as it is generating revenue. It is usually practiced in consulting firms and insurance agencies.
- Draw against commission: A “draw” is the money that a company provides initially to an employee. If the employee sells more than the initial amount, it will be considered their income and anything additional is the commission. However, if the employee’s sales fall short of the “draw,” they must return the initial amount to the company.
Hourly vs Salary Frequently Asked Questions (FAQs)
There are advantages to being paid both hourly and salary. For hourly workers, they are entitled to overtime pay (and time and a half) when they work more than 40 hours in a week. While salaried employees are generally not eligible for overtime, they receive a steady paycheck for each pay period.
When on salary, employees know exactly how much they will be paid each pay period. Aside from a steady paycheck, salaried employees usually have greater access to paid vacation leaves, bonuses, and benefits. However, salaried workers are not eligible for overtime and do not receive additional pay when they work more than 40 hours per week.
The biggest disadvantage to being paid hourly is that employees are not eligible for benefits. While some companies choose to allow their hourly employees to sign up for benefits, such as paid time off or healthcare coverage, most do not. Hourly employees do qualify for health benefits if they work full-time (over 30 hours a week per the Affordable Health Care Act, although some states and employers go as low as 20).
Bottom Line
Whether you should pay your employees hourly versus salary, commission vs salary, or commission vs hourly depends on the flow and structure of your business. They all have pros and cons, and matching them with the right positions is essential so that you’re not paying money you don’t have to. Salaries are more suitable for established positions with a high level of schedule and work predictability, whereas hourly is great for fluctuating work demand. Meanwhile, commission is ideal for positions that directly impact sales.
