Salary Vs Hourly Rate: What To Pay Staff

30.06.2024 04:08

RealBusiness.co.uk

As a business owner, one of the most fundamental decisions you can make is deciding if you will have salaried employees, or employees who are paid hourly. A salaried or hourly employee will notice different benefits – as will you as the business owner, too. Understanding these pros and cons, weighing up whether an annual […]

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Whichever you decide upon, you’ll need to ensure that it’s consistent across all employees. Having hourly workers and salaried employees just makes things confusing for you and your finance team, and also creates tensions amongst your staff. Pick which is best for your business and industry and ensure that every employee receives an employment contract making clear how, how much, and when they’ll be paid.

Below we’ll compare what hiring a salaried employee on an annual salary vs an hourly employee who receives hourly pay for every hour worked will look for you as a business owner, helping you decide which is right for you.

What’s The Main Difference Between Hourly Pay And Annual Salary?

What Is Hourly Pay?

Hourly pay just means that your employees are paid for every hour they work as your employee. This will be agreed upon before they sign the employment contract, but will need to at least meet the minimum wage standards in the UK – as of the 2024-2025 tax year, that minimum is:

From 1 April 2024	Amount Per Hour
21 and over	£11.44
18-20	£8.60
16-17	£6.40
Apprentices	£6.40

You may choose to pay your employees over this amount if you want to be more attractive to candidates. If you choose to go the hourly wage route for your workers, you’ll need to keep track of how many hours worked for the pay period (can be weekly, bi-weekly, monthly) and pay them accordingly.

The amount you pay may fluctuate each month.

What Is An Annual Salary?

When you choose to hire a salaried employee instead, they will be paid an agreed upon amount for the pay period based on their annual salary. For example:

If an employee agrees to an annual salary of £36,000 per year, and this is to be paid via a monthly salary, then they will receive £3,000 per month (minus taxes, national insurance, student loan deductions and pension contributions). They will receive this regardless of the number of hours worked, unless overtime pay is agreed between both parties.

The employer pays the pre-agreed amount each month (or bi-weekly, if you prefer) for the work completed, but if the worker completes extra hours above, say, the 37.5 hours required in their employment contract, then they won’t usually be paid for this, unless it was completed as pre-agreed overtime.

How Do You Calculate Pay For Salaried Employees Vs Hourly Employees?

Calculating the pay for salaried employees is incredibly easy and it will remain consistent each month unless overtime is completed. That means, they will receive their salary pay as a fixed amount for the agreed upon pay period. If this is as a monthly salary, then they’ll receive their annual salary divided by 12 each month.

For hourly pay, this becomes slightly more complicated. You’ll obviously agree with each of your employees what their hourly wage will be – meeting the minimum wage requirements at least. You will then need to properly monitor their hours worked for the pay period. This is usually done via a ‘clocking in/clocking out’ system, where you will then take the number of hours worked over the pay period, multiply it by the hourly employee’s per hour wage to give you their pay for any given period. This will obviously fluctuate each pay period depending on their hours worked.

Pros And Cons Of Salaried Pay

With everything in business, there are pros and cons to both options, for both you as the business owner and your employees. Below we’ll explore both the benefits and disadvantages of hiring salaried employees.

Benefits Of Hiring Salaried Employees

pros of salaried employees

Attractive To Candidates

The first, and probably biggest, positive for you as a business is that when you advertise job roles, you’ll usually find more interest if you’re able to advertise a salary range for candidates.

Having the pay section of a job description read:

£20,000-£25,000 per annum (depending on experience)

Looks a lot better than:

£12 – £14 per hour (depending on experience)

It’s common knowledge in the business world that a salaried position will receive more applications than those offering only hourly wages to their workers.

Employee Loyalty

Salary workers are much more likely to remain loyal to a business for longer. Why? Simply because as humans we like to know what to expect. If you can offer an employee consistent pay each month, so they can plan their lives accordingly to meet their living expenses, then they are much more likely to stay with you.

Allows Flexibility

Salaried positions can usually offer much more flexibility to employees. For example, if you had an employee that couldn’t work Tuesday afternoons due to care commitments, then you could offer them the opportunity to complete their 35 hours per week over 4.5 days, rather than the typical 5.

This flexibility is valued by employees, but it also allows your business to be more flexible too, meaning you can hire talent regardless of whether or not they can be on site for 8 hours a day, 5 days per week.

Consistent Pay

Consistent pay is obviously great for the employee, but it makes your life as a business owner (and perhaps more accurately, your finance team’s lives) much easier because they know how much each employee will receive as base pay for the pay period. This makes financial planning much easier for your business, too.

Increased Benefits

Salaried employees usually benefit from increased benefits, such as health insurance, gym memberships, access to private healthcare, etc. Whilst this may seem like a drain on your business, it actually fosters an excellent culture in your workplace, improving your employees’ quality of life and making them feel much more positive about working for your business. This increases productivity and loyalty, and just makes your business more attractive to future talent!

Disadvantages Of Annual Salary Employees

Can Be More Costly

As the employer, you may find that having salaried employees is actually more expensive for you as the business. This is because everything is pre-agreed with a salaried employee. You can’t make changes to their working hours easily if the workload is reduced and you don’t need them at that time. For hourly employees it’s much easier to ask for their shift to be reduced to save your business money where necessary.

Overtime Pay Becomes Complicated

With annual salaries overtime pay becomes more complicated because it’s difficult to say exactly how much the employee should be paid per hour worked, when they aren’t already set up as an hourly employee.

Of course, it’s still possible to work this out by dividing their typical monthly salary by the number of hours they typically work to figure out their hourly rate. You may then choose to give them additional pay, such as 1.5 x or 2 x their hourly pay.

Regardless, it’s more complicated to work out and implement for you and your finance team.

Some Employees May Take Advantage

Sometimes salaried employees may take advantage of the fact that their pay is guaranteed each month. Whilst many employees will be grateful for the consistent pay and will work hard for you to show that, a select few may take advantage, lowering their productivity and failing to show up for work on time or leaving early because they know they’ll get paid anyway. That’s why a way to monitor time spent at work is still often required, even when you aren’t paying your employees by the hour.

Pros And Cons Of Hourly Pay

Hourly pay also enjoys some unique benefits whilst suffering from some key disadvantages too.

Benefits Of Hiring Hourly Wage Employees

pros of hourly pay

Paid For Work Completed

Working with hourly employees means that they’ll be paid for every hour they work – and no more than. If they arrive at work for a 6am – 2pm hospitality shift, for example, but there is only enough work to last until 12pm, you are well within your right to ask if they would like to leave early. If they were given this shift as part of their regular working hours, they can refuse, but often the flexibility afforded by this work pattern means workers will be willing to leave rather than waste time at work when there are no tasks to complete.

Easy Overtime Pay

Overtime pay is much easier to work out when your employee is typically paid by the hour. You don’t need to offer any additional incentives such as 2 x their pay for overtime either, unless you want to. You’ll simply pay them for the extra hours per week they’ve worked as part of their overtime.

Attractive To Younger Employees

Often younger employees find hourly pay more attractive than older employees, typically. This can be good if you’re in the sort of industry that attracts younger workers such as hospitality. Here hourly wages are the norm, so you won’t look out of place by offering hourly pay rather than salaried positions.

Disadvantages Of Hourly Employees

Lack Of Benefits

There is little in the way of employee benefits when offering an hourly position. That can be seen as less attractive by some workers and may mean you notice a reduced candidate list to choose from when applications come in for any new job position you have available.

Less Loyalty

Hourly workers tend to be less loyal to any one business, as often the nature of their work means they are more flexible anyway. If another role were to pop up with even just a few pence per hour better pay, many hourly workers would be tempted to put in a job application.

Risk Of Cut Hours For Staff

When paying by the hour, staff can feel less secure in their position and hours worked. They may feel at risk of having their hours cut during quieter periods and this can cause some job dissatisfaction and a greater willingness to look elsewhere for work.

Which Payment Method Is Cheaper For The Business?

It depends on your business and the industry you operate in, largely.

For a business that hires younger employees on more flexible contracts – typically hospitality and travel and tourism sectors and the like – you can save more by opting for an hourly pay set up.

For a business with older professionals who may put in more work than their contracted hours without the expectation of being paid, salaries are often cheaper.

It’s a good idea to run the numbers for a few different imaginary employees that represent your workforce. This will give you a better idea about what the cheapest option for your business is.

Remember, though, that cheaper is not always better, so consider the other pros and cons outlined above before making a final decision.

Which Payment Method Is More Common?

Again, this differs by sector.

To illustrate the point, below is a list of some of the industries where hourly pay is most common:

hospitality
retail
travel and tourism
contract-based work

And for industries where salaried positions are more common:

marketing
consultancy
healthcare
web development

The most common payment method varies per sector. Check out what other competitors in your field are offering with their job advertisements to give yourself an idea about what is common practice in your industry, so you can give candidates what they’ll expect.

Should I Pay My Employees By The Hour Or Via An Annual Salary?

That really is a choice for each business owner to make independently. We would recommend fully considering the pros and cons of each outlined in this article, compare what is standard practice for businesses similar to yours operating in the same industry, and perhaps consulting your employees, too.

After all, if you want to serve your employees best, you’ll find out what works better for them – so long as the costs aren’t too great for the business.