February 2, 2005 by Israel Foulon LLP
Question: When hiring someone on a permanent, fulltime basis, what are the pros and cons of the employer paying the employee salary as opposed to wages?
Answer: The difference between salary and hourly wage is relatively straightforward — salary is a fixed payment for a defined period of time paid to a person for regular work or services, whereas an hourly wage is usually paid for work or services that are of a more irregular nature.
A key distinction between the two forms of payment is that where an hourly wage is paid, an employee receives compensation only for those hours that are actually worked. A salary earner receives his salary regardless of hours worked. Unlike a salary compensation scheme, an hourly wage earner will not be paid for any time they are not actually working. Where an employee is paid by salary, they will continue to be compensated despite any absences from work, unless a policy regarding pro-rating the salary has been built into their compensation scheme.
Using illness as an example, an employee on salary will continue to be paid for any duration away from work due to illness, unless the number of days allowed for illness has been pro-rated. Where “sick days” have been prorated, the employee will still be paid for the allowable time away due to illness. In contrast, an hourly wage earner will not be paid for any time away from work due to illness, as they are only paid for work actually performed.
A wage earner does not receive sick days. It is therefore important for an employer paying salary to ensure a prorating system is in place in order to limit the amount of money paid to that employee for time they are not actually working. Conversely, the fact that sick days are available under a salary may be an incentive an employer can use to ensure they attract the right employees. A common misconception about wages is that only those persons paid by hourly wage are capable of receiving overtime pay. Under this misconception, one could conclude that paying salary would be more beneficial for the employer as it would allow more consistent and predictable budgeting. This conclusion would be incorrect.
Overtime pay is payable to both hourly wage earners and employees paid by salary. Only where the sole duties of the employee are managerial in nature is the employer exempt from paying overtime, whether that employee is paid by wage or salary.
Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@qtw38575.mywhc.ca. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today