Comparing Salary vs Hourly vs Commission Employees: Which Is Better for Your Business?
This article is part of a larger series onHow to Do Payroll.
A salaried employee is paid a regular fixed rate regardless of the number of hours worked for each pay period. 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. An employee earning a commission, particularly those in sales and marketing, typically earns a percentage of their sales; some receive a commission as an addition to their base (guaranteed) salary.
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:
Note:Although hourly workers are the primary ones who receive overtime pay, some salaried workers can as well (though not common) if they’re classified as nonexempt. You’ll notice the terms “exempt” and “nonexempt” used throughout this article. For a more in-depth read, check out our guide onexempt vs nonexempt employees.
Employee Types at a Glance
Aside from a steady paycheck, salaried employees usually have greater access to paid vacation leaves, bonuses, and benefits than hourly employees. Hourly employees, however, are usually entitled to state and/or federal-approved minimum wage and receive additional pay if they work overtime.
Commission-based employees’ pay can fluctuate as it depends on the rate at which they’re able to sell a product or service.
Salary |
Hourly |
Commission |
|
---|---|---|---|
Minimum Salary |
Minimum salary of $684 weekly or $35,568 to avoid paying overtime |
Federal minimum wage ($7.25) or state minimum wage -whichever is higher
|
Federal minimum wage ($7.25) or state minimum wage -whichever is higher
|
Wage Rate |
Fixed-rate predetermined by employer annually |
Paid by the hour for work rendered using a specified hourly rate |
Base salary rate + percentage of revenue brought in
Straight commission- no base or hourly rate |
Work Hours |
Salaried exempt workers are typically paid for 40 hours a week |
Varies |
Varies |
Overtime Eligibility |
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) |
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 |
Most jobs include benefit offers like health and retirement plan options |
Availability of benefits varies |
Benefits are commonly offered |
For help with payroll calculations, including calculating time for salaried and hourly workers, check out our guide onhow to calculate payroll.
如何选择工资,每小时&佣金
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. For instance, 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.
Salaried Employees
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.
There are a few exceptions under the Fair Labor Standards Act (FLSA) where it is permissible to deduct money from an exempt employee’s salary.
- Absences of one or more full days due to illness or disability, including work-related accidents (deductions for partial days are not allowed)
- To offset amounts employees receive as jury or witness fees, or for military pay
- Penalties imposed in good faith for infractions of safety rules of major significance (both full and partial days)
- Unpaid disciplinary suspensions of one or more full days imposed in good faith for violations of workplace conduct rules such as harassment and violence (deductions for partial days are not allowed)
- Absences under the Family and Medical Leave Act, or the FMLA (both full and partial days)
- During the initial or final week of employment, if the employee works less than a full week (both full and partial days)
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 canbudget your payrollfor 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) | |
Employees can rely on a steady paycheckper period |
受薪雇员,信用卡诈骗罪是很重要的r 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 ourguide to compa ratios.
Hourly Employees
简而言之,每小时的员工必须在勒ast 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. Human resources employees who work less than 40 hours a week are classified as part timers.
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. Generally, employees are entitled to a minimum wage of no less than $7.25 per hour, although it depends on the hourly rate based on the state minimum wage legislation; some are higher. Aside from that, they are not usually given the same benefits like paid vacation, retirement plans, or even bonuses. 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 ontimecardsand manage all the calculations |
Employers pay for actual work performed and can save money by not providing a salary |
If you have hourly employees that require you to verify time sheets, it’s a good idea to invest in a reliabletime clockor time-keeping system likeHomebaseto make it easier.
Commission-based Employees
Commission-based workers are compensated based on the revenue they generate for your business rather than a straight salary. Usually, commission-based employees work in sales, retail, real estate, insurance, and the stock market. 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., sales people) |
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 |
For help doing your payroll in-house, check out our guide onhow to do payroll.
Bottom Line
Whether you should pay your employees hourly vs salary vs a commission 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, considerGusto. 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 for a 30-day free trial today.