California Small Business: Hourly vs. Salaried Employees

Great news: your business has expanded so much that you need an extra pair of hands to keep everything going and your clients happy. Before you hire your first employee, though, you have to determine if you are offering an hourly or salaried position. This blog will go over some of the important distinctions between these two types of compensation. 

Salaried vs. Hourly Compensation

Salaried workers often sign an employment contract before beginning their position and are usually paid a set amount every month based on a 2,080-hour work year. Pay periods can differ from company to company. On the other hand, hourly workers often have their work schedule change from week to week. Hourly workers are entitled to meal and rest breaks and to overtime pay as well, which is counted as time-and-a-half. This rate kicks in when an hourly employee works more than 40 hours in a week (the federal standard) or more than eight hours in one day (California’s standard). 

Salary Basis Test

When someone is hired as an employee or a position is created within a company, the compensation type is presumed to be hourly. If an employer wants the position to be salaried, then the position must be proved to be exempt from overtime pay and the other benefits for hourly workers.

The federal government determines this using the Salary Basis Test, which is administered by the Department of Labor. California has something similar that is used to determine whether an employee is hourly or salaried. There are three parts to this test:

  • When calculated, the hourly rate for salaried employees must be at least twice the state’s minimum wage. 
  • The duties of the salaried employee must be administrative, executive, or professional in nature (white collar).
  • Independent business judgment must be used by the salaried employee in his or her position. 

Consequences of Misclassification

Employers can run into trouble when they misclassify workers who should be paid hourly as salaried instead. In addition to penalties and legal costs for misclassifying employees, employers may be on the hook for unpaid overtime. This is one of the most common consequences of misclassifying hourly employees as salaried. Other issues include having to pay back compensation for breaks not taken or penalties for not keeping proper employee records. 


As you begin to hire workers for your business, carefully consider your goals and circumstances in deciding whether you will compensate them hourly or via a salary. Once you know what you would like to do, it’s a good idea to seek the advice of an experienced employment law attorney who can help you with the contracts and other documentation you will need to protect yourself, your business, and your employees from future legal disputes. For effective legal counsel, call IGC today at 925-399-1529 to learn more about your options. 

Integrated General Counsel