What is salary pay?
Salary pay refers to a fixed amount of compensation paid to employees on a regular basis, typically expressed as an annual amount, regardless of the number of hours worked or the fluctuations in their weekly workload.
Unlike hourly pay, where compensation is directly tied to the hours worked, salary pay provides employees with a predictable income, paid either weekly, biweekly, semi-monthly, or monthly. For small business owners, it’s important to identify which employees should be compensated hourly vs. through salary. Commonly, managerial, professional, and administrative roles are compensated by salary.
Why salary pay matters for employers
Salary pay is beneficial for both employers and employees. Here’s why it’s an important compensation model to understand:
- Predictable compensation: Offering salary pay provides employers with a fixed budget for labor costs, which reduces the need to calculate pay based on fluctuating hours. Employees benefit from the stability and predictability of their income.
- Employee retention: By offering competitive salary packages, employers can attract talented individuals who prefer the stability and structure of a fixed income, since salary pay is often associated with higher-level positions with greater responsibilities.
- Simplified payroll administration: For businesses that have employees working in roles with varying hours, salary pay simplifies payroll administration. Employers don’t need to track every hour worked, which reduces administrative work, potential errors, and compliance risks.
- Encourages performance over hours worked: Salary pay allows employees to focus on fulfilling their responsibilities rather than counting hours. This shift in focus helps to align their efforts with organizational goals and objectives.
How salary pay structures work
Salary pay works by compensating employees with a set amount, typically paid in equal installments over a pay period. Here’s a breakdown of how it can work:
- Annual salary: The most common form of salary pay is an annual amount, which is divided by the number of pay periods (e.g., weekly, biweekly, or monthly). For example, if an employee has an annual salary of $60,000 and is paid monthly, they will receive $5,000 each month, regardless of the number of hours worked.
- Salary for exempt employees: Most salaried employees are considered "exempt" from overtime pay under the Fair Labor Standards Act (FLSA), meaning they do not receive additional pay for hours worked beyond 40 hours per week. Exemption status depends on meeting certain criteria related to job duties and salary levels
- Salary for non-exempt employees: Some salaried employees are classified as "non-exempt" and are entitled to overtime pay for hours worked over 40 hours per week. In such cases, the salaried employees are still paid a fixed amount, but they receive overtime pay for any hours worked beyond the regular workweek.
- Benefits and bonuses: In addition to the base salary, salaried employees may receive additional compensation in the form of bonuses, incentives, or benefits. For example, annual bonuses, health insurance, retirement contributions, and other perks may be offered as part of the total compensation package.
How to keep your salary pay compliant
While salary pay offers flexibility and predictability, it must be managed in compliance with both federal and state laws. Below are key considerations for employers:
- Fair Labor Standards Act (FLSA): Under the FLSA,exempt employees are typically not entitled to overtime pay, while non-exempt salaried employees must receive overtime for hours worked beyond 40 hours in a week. Employers must ensure that salaried employees meet the required criteria for exemption.
- Minimum salary requirements: Under the FLSA, exempt employees must meet certain salary thresholds to qualify for exemption. As of 2020, the minimum salary for an exempt employee is $684 per week, or $35,568 annually. States may have their own higher salary requirements, so employers should stay informed of local regulations.
- Overtime pay: For salaried employees classified as non-exempt, employers must calculate overtime pay at 1.5 times the employee's regular hourly rate for hours worked over 40 hours in a workweek.
- Salary deductions: Follow legal guidelines when deducting from an employee’s salary. Deductions may include taxes, retirement contributions, and insurance premiums, but deductions for partial day absences are generally not allowed under salary pay unless the employee has sufficient leave balances to cover the absence.
Compliance is easier when you can automatically stay up to date, which is why so many small business owners use payroll software to process payments for salaried employees.
Mistakes to avoid when paying employees via salary
Employee compensation is an important process that could significantly impact your business’ budget as well as your team’s morale. Try to avoid these common mistakes to keep your business compliant and your employees happy:
- Misclassifying exempt vs. non-exempt employees: Misclassifying non-exempt employees as exempt could result in unpaid overtime claims and penalties.
- Failing to track overtime for non-exempt salaried employees: Failure to track and compensate overtime accurately can result in legal and financial consequences.
- Not updating salary pay for inflation or market standards: Over time, salary levels may need to be adjusted to remain competitive in the market or to account for inflation. Employers should regularly review salary offerings to ensure they remain attractive to top talent and maintain employee satisfaction.
- Inconsistent salary adjustments: Employers should ensure that salary adjustments, whether for performance or cost-of-living increases, are applied consistently and transparently across the organization. Failing to do so can lead to employee dissatisfaction and a lack of trust.
How Homebase helps with salary pay
Homebase simplifies salary pay management by automating payroll calculations, ensuring that salaried employees are paid accurately and on time. You can track time worked, calculate payroll, and ensure compliance with overtime laws for non-exempt salaried employees, all within the same platform.
With Homebase, you can:
- Automate salary pay for consistent, predictable compensation
- Track hours worked to ensure compliance with overtime rules for non-exempt employees
- Manage salary adjustments, bonuses, and benefits seamlessly
- Ensure payroll compliance with state and federal regulations
Sign up for Homebase today to automate salary pay, simplify payroll management, and ensure your employees are compensated accurately and on time.