Salary vs wage: What's the difference? What are the pros and cons of each? Which one's better? Find the answers to these questions and more in this guide.
Updated 17 May 2024
As an employer, one of the most important decisions you need to make when hiring someone is picking which compensation structure suits your candidate. Choosing the right structure comes with many benefits.
In Canada, employees are commonly paid in two ways: salaries and hourly wages. While these terms are often used interchangeably, there’s actually a huge distinction.
So, which one’s better? In this article, the Canadian HR Reporter delves deeper into the topic of salary vs wage. We will explain the key differences and the benefits and drawbacks of each. If you’re an employer or HR professional working out which payment structure to use, you’ve come to the right place. Find out what distinguishes salaries from hourly wages in this guide.
Salary vs wage: meaning
Canadian employers have several options when it comes to paying their employees, the most common of which are salaries and hourly wages. While sometimes confused with each other, these payment structures are different. But before we discuss the differences, let’s first define what these terms mean.
What is a salary?
A salary is a fixed amount that employers agree to pay their employee during a given period, usually one year. Depending on the agreement, employers can opt to pay worker salaries in weekly, biweekly, or monthly increments. Provinces and territories often have laws on the allocation and payment of salaries.
A salary consists of an employee’s base pay. This means that it’s separate from commissions, bonuses, and other taxable benefits.
What is a wage?
A wage is paid to employees based on an hourly rate and the number of hours they take to complete any assigned work. It is usually paid weekly or biweekly. Employers often give hourly wages to employees performing repetitive tasks, part-time jobs, or irregular work hours.
Hourly wages are also given at a base pay rate. But unlike salaries, which are fixed amounts, an employee’s wage depends on the number of hours they work within a pay cycle.
Salary vs wage: what’s the difference?
While sometimes mistaken for one another, salary and wages have “relatively straightforward” differences, according to Peter Israel, a labour and employment law expert at Israel Foulon Wong LLP.
“Salary is a fixed payment for a defined period of time paid to a person for regular work or services,” he explains. “Whereas an hourly wage is usually paid for work or services that are of a more irregular nature.”
Compensation
A key distinction between the two forms of payment, Israel notes, is that where an hourly wage is paid, an employee receives compensation only for those hours that are actually worked. A salary earner, meanwhile, receives a fixed amount regardless of the hours worked.
“Unlike a salary compensation scheme, an hourly wage earner will not be paid for any time they are not actually working,” he explains. “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.
This means that an employee on salary will continue to be paid for any duration away from work due to illness. An exception is if the number of days allowed for illness has been pro-rated. When this is the case, the employee will still be paid for the allowable time away due to health reasons.
Benefits
Salaried workers often have access to various employment benefits that their wage-earning counterparts don’t. Among these are parental leaves and paid time off.
“A wage earner does not receive sick days,” Israel notes. “It is therefore important for an employer paying salary to ensure a pro-rating system is in place in order to limit the amount of money paid to that employee for time they are not actually working.
Sick days that are offered under a salary are common incentives which an employer can use to attract employees and are becoming more common all the time.
Overtime pay
According to Israel, a common misconception about salary vs wage is that only workers paid by hourly wage are eligible for 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,” he explains.
“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.”
How are salaries and hourly wages calculated?
Because of the differences in compensation structures, salaries and hourly wages are also calculated differently.
Salary sample calculation
To calculate the earnings of a salaried employee within a pay period, the fixed annual amount is divided by the number of pay cycles for the year.
Here’s a sample calculation for a salaried worker who earns $60,000 yearly and is paid on a biweekly basis.
The salaried employee collects a paycheque of almost $2,307.70 before deductions biweekly.
Hourly wage sample calculation
For wage earners, the hourly wage is multiplied by the number of hours they worked during the pay period.
Here’s a sample calculation for an hourly wage earner who worked 40 hours a week at a rate of $16 per hour and paid biweekly.
The wage earner receives a paycheque of $1,280 before deductions during the pay cycle.
Regardless of whether the employee is paid a salary vs wage, the amount they earn is influenced by several factors, including:
- employee’s role within the company
- responsibilities and expectations for the role
- employee’s experience level and educational background
- employee’s tenure with company
- where the business is located and the cost of living in the area
- industry average with similar positions
- industry demand for jobs for available and qualified workforce
Find out which Canadian provinces have the highest predicted salary increases in this report.
Salary vs wage: pros and cons
As an employer, the decision on whether to pay an employee a salary or an hourly wage is up to you. Each compensation structure comes with its share of benefits and drawbacks. Here’s a snapshot of the pros and cons of each system to help you in your decision.
Pros of paying an employee a salary
Helps you attract employees
Offering a fixed salary raises your chances of landing top talent. This is because most employees prefer the sense of security a stable and consistent pay provides. Salaried employees are also entitled to paid time off and other benefits not accessible to wage earners.
Simplifies payroll and accounting
Paying your employees a fixed salary eliminates the need for a time clock or a similar tracking system. You also don’t need to adjust timecards if your employees take time off or make a mistake on their timesheets. This reduces the time you spend accounting and your payroll administration costs.
You may not need to pay for overtime
Salaries are typically based on a 40-hour work week. Some salaried employees, however, work more than 40 hours. And even if they do, not everyone is eligible for overtime pay.
Cons of paying an employee a salary
Less flexibility
Using a salary compensation structure prevents you from adjusting costs when your revenue fluctuates. Not having this level of flexibility is disadvantageous, especially during a slow season.
Employee dissatisfaction
Requiring your employees to work overtime frequently to stay on top of their deliverables or complete a project can lead to dissatisfaction. This is especially true if they’re not getting additional compensation.
Pros of paying employees an hourly wage
Paying only for hours worked
A wage earner’s pay is reflected in the number of hours they worked. This helps ensure that employers pay only for the hours the employee worked productively.
Fewer barriers for employment
Many roles that are paid hourly wages don’t require higher education. These include servers, retail associates, and security guards. Fewer entry barriers also mean that it’s easier for candidates to secure employment. But there’s a catch – employees can also easily seek another job that pays higher.
More flexibility in personnel costs
Paying employees in hourly wages gives you the flexibility to adjust personnel costs, depending on your expected revenue. One way of doing this is by reducing work hours.
Cons of paying employees an hourly wage
Need to track work hours
If you employ wage earners, you need to keep track of how many hours they work. For this, you may need to invest in a reliable time-tracking system to prevent costly errors in wage calculations.
Higher overtime pay
Provinces and territories have their own rules on how many hours wage earners can work in a week. If their work hours exceed the set number, they are entitled to additional compensation. Overtime pay is often 1.5 times the employees' hourly rate. Those who work undesirable shifts or irregular hours may even be paid higher.
Regardless of whether the employee receives a salary or an hourly wage, most of them are entitled to statutory holiday pay. Find out how much you need to pay if your employees work on a stat holiday in this guide.
Salary vs wage: how do you know which one’s better?
Deciding whether to pay your employees a salary or hourly wage can be tricky, especially if your knowledge of employment law is limited. Recently, CHRR unveiled our five-star awardees for Best Employment Lawyers and Law Firms in Canada. By partnering with these specialists, you can be sure that your business is compliant with the labour and employment laws in your jurisdiction.
Salary vs wage, which do you think is better? Do you agree with the benefits and drawbacks of each pay structure that we laid out? Feel free to share your thoughts below.
