Things to Consider Before Switching Employees from Hourly Pay to a Salary

by Greg DePersio

2 min read

There can be advantages to switching an employee from hourly to salaried pay, but this shift isn’t the right decision in every circumstance. When trying to decide if it is the right time to bump your employee from hourly pay to a salary, there are several elements you should take into account.

Overtime Pay

Salaried employees receive overtime pay just as hourly employees do, but the rate is simply calculated differently.

For example, if you pay your employee $12 per hour, the overtime rate is $12 x 1.5 or $18. To determine the overtime rate for salaried employees, divide the weekly salary by the usual number of hours worked to get the hourly rate. Then, multiply by 1.5. An employee with a weekly salary of $1,000 and a 40-hour work week earns $25 per hour and has an overtime rate of $37.50.

If you want to avoid paying an employee overtime, you can’t just decide to pay them a salary. Instead, you have to let them work fewer hours. Only exempt employees such as lawyers, doctors, architects, landscapers, engineers, and information technology professionals are not entitled to overtime pay. Managers also fall into this category.

Managerial Promotion

If you promote an employee to a managerial-level role, you can pay them an hourly rate or a salary, but you don’t have to pay overtime. In cases like this, it makes sense to switch your employee from hourly pay to a salary. In explanation, the salary covers all the hours your employee works, but with hourly pay, you have to pay for each hour your employee works. That can drive your costs up if your employee works a lot of extra hours.

To be considered managers, employees must supervise other employees, open or close the shop, or have other significant responsibilities. Also, you cannot require anyone to work more than 48 hours unless you obtain approval from the Ministry of Labour.

Easier Timekeeping

Salaried employees receive the same amount of money every week, unless they trigger overtime pay by working more than 44 hours. That can make timekeeping easier. Salaried employees don’t need to punch in or out, unless you want that information for your records, which can be convenient for remote workers or telecommuters. Paying your employee the same amount every pay period can make your payroll accounting easier, too.

Employment Expenses

Salaried employees, unlike hourly workers, can deduct employment expenses on their tax returns. By extension, if you need your employee to cover employment expenses, such as office supplies, business travel costs, or home office expenses, you may want to pay them a salary. In these cases, you need to fill out Form T2200 (Declaration of Conditions of Employment), and your employee needs to submit Form T777 (Statement of Employment Expenses). It’s also important to ensure you meet your legal obligations as an employer and don’t require your employee to pay for things that you should be providing.

References & Resources

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