How, and how much, employees are paid can make or break your startup.

In a previous post, we discussed the differences between interns, volunteers, employees, and independent contractors. Now that you have chosen employees, you have another big decision to make:  whether they will be hourly or salaried. As a refresher, the amount of money paid to hourly employees is calculated by multiplying an hourly wage by the amount of hours worked in a given time frame, while salaried employees receive a fixed amount of money for their services on a periodic basis. Assume that an hourly employee is paid $15 an hour, he works for 40 hours a week, and he works 50 weeks a year. Multiply that out and it comes to $30,000 a year. Is that the same as hiring a salaried employee for $30,000 a year? Not quite. There are a couple of ways in which these two scenarios differ.

Exempt or non-exempt

The Fair Labor Standards Act (FLSA) is the law which establishes, among other things, minimum wages and overtime. The FSLA creates two categories of employees: “exempt” and “non-exempt”. “Exempt” employees are exempt from the provision of the FLSA which says that employees who work more than 40 hours per week must be paid overtime.[1] All hourly employees are “non-exempt” and must be paid time and a half for overtime.[2] For example, if the employee in the previous paragraph worked 50 hours in a week, then his compensation would be 40 X $15 for his regular 40 hours plus 10 X $22.50 for the 10 overtime hours. Salaried employees, on the other hand, can be, but are not necessarily, exempt. A salaried employee can be exempt if they work in an “executive, administrative, or professional capacity”[3] and earn more than $455 per week;[4] that comes to about $11.38 per hour. Employees that work in an executive, administrative, or professional capacity may have job titles that include words such as “manager,” “consultant,” or “advisor”, and the Department of Labor provides worksheets with more examples that you can find here, here, and here.

Benefits

The requirement to provide certain benefits is not linked directly to whether your employees are hourly or salaried. Certain benefits are mandated by federal law; some are required and others depend on how many hours per week the employees work.

  • According to the Affordable Care Act (ACA), if you have 50 or more employees, you are required to provide health insurance to those that work more than 30 hours per week.[5] Some businesses owners decide to keep their hourly employees to under 30 hours a week to save on the cost of providing health insurance, paid time off, and other benefits.[6]
  • Companies that have 50 or more employees are also subject to the Family and Medical Leave Act (FMLA). This law mandates that employers must give employees up to 12 weeks of unpaid leave in the case of birth or adoption or a serious medical problem of a worker or a family member. Upon completion of the time off, the employee must be reinstated in the same job or an equivalent one.[7]
  • There are also certain benefits that are required by law, no matter how many employees you have or how many hours they work. Mandated benefits include: Social Security and Medicare contributions (both employees are employers are required to contribute to these funds), unemployment insurance, and workers’ compensation insurance.[8]

State laws may differ and may be more stringent than the abovementioned federal laws, so be sure to verify your state’s requirements to ensure that your policies comply with both federal and state regulations.[9]

More factors to consider

Up to this point in this post, you may be thinking that the best option is to have less than 50 employees, have them work less than 30 hours a week, pay them hourly, and offer only the mandated benefits to save the maximum amount of money for your company. This plan may work at first, but things change quickly in a start-up, so flexibility will most likely be required. If business really takes off and you need more help, you will have to choose between increasing the hours of your current employees or hiring new employees. On one hand, training new employees requires time and effort and it will take them some time to be as productive and efficient as current employees. On the other hand, increasing the hours of your current employees may require you to start paying for their health insurance, and/or paying them for overtime.  Remember that as your company’s situation changes, you will have to make decisions that will affect your legal obligations to your employees.

You should also think about your offer from the perspective of a potential employee. The general cultural expectation in the US remains the traditional 8-hour workday.[10] Also, although you are not required to provide them, many employees have come to expect additional benefits like retirement plans, health plans, dental or vision plans, life insurance plans, paid holidays, paid vacation time, education assistance, or child care assistance.[11] Benefits like these have become an important part of the decision-making process for candidates comparing job offers. They may pick another company over yours if the benefits are better, and they will be more likely to jump ship if a better opportunity comes along.[12]

Furthermore, some employees might prefer a salary as opposed to hourly pay. Receiving the same amount of money every pay period no matter how well or how poorly the company is doing provides a sense of stability to salaried employees.[13] They know that you will not reduce their hours or their pay in difficult times. Offering this stability is more likely to create a sense of loyalty and salaried employees should be willing to give 110 percent when things get busy.

Conclusions

Ultimately, the best choice will be directly related to your company’s needs. Hiring a majority of hourly employees is certainly a common, workable, efficient solution for startups. However, hiring a select few salaried employees (if they are people that you someday want to become leaders within your company) is not a bad idea. It shows your faith in them and encourages them to stick around. Be clear that you have high expectations for them, but also big plans. And do not neglect benefits. Not only are there certain benefits that are required by law (remember to check the law of the state you are operating in) but employees have certain expectations and offering a few extra benefits can go a long way. Ask what benefits people are most interested in and be creative when designing and implementing the benefits your employees have asked for. And keep in mind the ultimate goals: keeping costs down for your business and keeping employees satisfied.

[1] § 207. Maximum hours, 29 USCA § 207

[2] Id.

[3] § 213. Exemptions, 29 USCA § 213

[4] https://www.thebalancecareers.com/hourly-vs-salary-employees-2063373

[5] https://www.investopedia.com/articles/personal-finance/031115/salary-vs-hourly-how-benefits-laws-differ.asp

[6] Id.

[7] https://www.paychex.com/articles/employee-benefits/employee-benefits-a-company-must-provide

[8] Id.

[9] https://www.wonolo.com/blog/salaried-employee-vs-hourly/

[10] https://www.topuniversities.com/blog/differences-average-working-hours-around-world

[11] https://www.entrepreneur.com/article/80158

[12] Id.

[13] https://www.thebalancecareers.com/hourly-vs-salary-employees-2063373