A salaried employee is paid a regular fixed rate regardless of the number of hours worked for each pay period, whereas an hourly employee is 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. Meanwhile, commission-based employees can receive salary or hourly rates; the commissions often supplement their base pay. Some, however, work only on commission, often as independent contractors.
Key Takeaways—hourly vs salary vs commission
- Salary employees are paid a flat amount regardless of hours worked
- Hourly employees receive overtime after 40 hours in a week
- Both have minimum pay requirements per federal and state laws
- Salaried employees get benefits; hourly employees working over 30 hours per week/130 hours per year must receive health benefits
- Commission employees can also receive salary or hourly rates
For help understanding the different types of employees and which is best for your business, check out our Salary vs Hourly vs Commission article, part of our Payroll Video Library:
Hourly vs Salary vs Commission: Employee Types At a Glance
Hourly | Salary | Commission | |
|---|---|---|---|
Types of Work | Restaurant, retail, labor, blue-collar | Professional white-collar | High-ticket sales, insurance, real-estate |
Minimum Salary | Federal minimum wage ($7.25) or state minimum wage - whichever is higher | Exempt: Minimum salary of $684 weekly or $35,568 to avoid paying overtime - Higher in some states Non-exempt: at least minimum wage for contracted number of hours | Federal minimum wage ($7.25) or state minimum wage - whichever is higher |
Wage Rate | Paid by the hour for work rendered using a specified hourly rate | Fixed-rate predetermined by employer annually | Base salary rate + percentage of revenue brought in Straight commission - no base or hourly rate |
Work Hours | Varies | Salaried exempt workers are typically paid for 40 hours a week | Varies |
Overtime Eligibility | Entitled to time and one-half their "regular rate" of pay under the FLSA for each hour they work exceeding 40 hours (some state rules vary) | Not eligible for overtime pay regardless of hours put in and kind of work done except if status is salaried, nonexempt | Entitled to time and one-half their "regular rate" of pay under the FLSA for each hour they work exceeding 40 hours (some state rules vary) |
Benefits Entitlement | Availability of benefits varies (health care mandatory for 30+ hours) | Most jobs include benefit offers like health and retirement plan options | Benefits are commonly offered |
Exempt employee: An employee who is “exempt” from receiving overtime pay because of their duties and salary
Nonexempt employee: An employee who will receive overtime pay in accordance with federal and state law because of their duties and salary
Note on Benefits: Aside from a steady paycheck, salaried employees usually have greater access to paid vacation leaves, bonuses, and benefits. Hourly employees get 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). Commission-based employees are entitled to benefits if they are not independent contractors and work over 30 hours a week.
How to Choose Between Salary, Hourly & 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.
On the other hand, firms with eight-hour workday schedules often hire salaried employees. However, many professional and consulting service employees don’t have standard hours at all—and receive a salary regardless of the work hours put in. And, commission-based jobs, such as in insurance or certain types of retail sales, may or may not have set hours.
For help with payroll calculations, including calculating time for salaried and hourly workers, check out our guide on how to calculate payroll.
Salaried Employees
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 is 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.
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
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.
| 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 | |
With salaried employees, it’s important to consider the compa (or compensation) ratio, allowing you to know whether you are paying them competitive salaries. For more information and help calculating it, check out our guide to compa ratios.
Exempt vs Nonexempt Salary Employees
Salary rates come to $17.10 an hour minimum—well over minimum wage. However, you may 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, nonexempt employees must be paid time and a half for any time over 40 hours a week. For a more in-depth read, check out our guide on exempt vs nonexempt employees.
Hourly Employees
Hourly employees usually work in service industries, shift work jobs, or other jobs with fluctuating workweeks, like construction.
In a nutshell, hourly employees must be paid at least the federal minimum wage for each hour worked. They must 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.
They 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 $684. (Note: Salaried employees can be classified as nonexempt, but hourly workers are always considered nonexempt.)
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.
| 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 |
If you have hourly employees that require you to verify time sheets, it’s a good idea to invest in a reliable time clock or time-keeping system like Homebase to make it easier. Learn more about its features and pricing in our Homebase review or find more options in our guide to the best employee time clocks.
Commission-based Employees
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 adviser, 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.
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 fell short of the “draw,” then they must return the initial amount to the company.
Employers are also required to withhold payroll and federal income taxes on commissions.
| 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 |
For help doing your payroll in-house, check out our guide on how to do payroll.
Bottom Line
Whether you should pay your employees hourly vs 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.
If you want payroll software that can manage paying salary, hourly, and commission-based workers, consider Gusto. You can automate pay runs for salaried employees since they rarely change, get automatic overtime calculations for hourly workers, and use its commission-only classification feature to easily keep track of such employees. Sign up today and get one month free when you run your first payroll. Offer will be applied to your Gusto invoice(s) while all applicable terms and conditions are met or fulfilled.
