Converting Hourly Pay to Salary: Employer Guide

Converting hourly employees to salaried roles is a common move for employers seeking to adapt to evolving business needs. This transition often occurs when an employee assumes a new position, receives a promotion, or takes on additional responsibilities that require a broader scope of work. Employers may also make this change to simplify payroll processes, reduce administrative tasks, and provide employees with greater stability and predictability in their compensation.

For global organizations, understanding how to convert hourly pay to salary is essential because it’s not merely a simple calculation—it’s a process. Employers must consider legal requirements, employee classification, and local labor laws to ensure compliance with relevant regulations. Missteps in this area can lead to costly errors or legal complications, particularly when managing a diverse and international workforce.

In this guide, we cover everything employers need to know about converting hourly pay to salary. We delve into the calculation methods, outline key legal and classification factors, and offer best practices for a smooth transition. With these insights, employers can streamline payroll systems while supporting both business goals and employee satisfaction.

Hourly vs. salaried employees: What’s the difference?

Hourly employees are paid for each hour they work, which means their paychecks vary depending on the number of hours worked during a pay period. These roles often require employees to track their time and are usually classified as non-exempt. Non-exempt employees are protected by labor laws that guarantee overtime pay when they work beyond the standard workweek.

Salaried employees, on the other hand, receive a fixed annual salary that remains unchanged regardless of the number of hours worked each week. Many salaried positions are classified as exempt, which means these employees are not eligible for overtime pay. Exempt status is typically reserved for roles with higher-level duties or specific responsibilities, as defined by local labor regulations.

Understanding the difference between exempt and non-exempt employees is crucial. Exempt employees are not entitled to overtime pay, while non-exempt employees must receive overtime compensation for any hours worked over the legal threshold. This distinction, which is based on both salary and duties tests, affects how organizations classify roles, calculate pay, and maintain compliance across different regions.

Step-by-step: How to convert hourly pay to salary

Converting hourly wages to a salary is a straightforward process, but it requires careful attention to detail. Employers should follow the following steps to ensure fair pay, compliance, and a smooth transition for their teams.

Step 1: Determine the employee’s weekly hours

Start by identifying the number of hours the employee works each week. The standard for full-time roles is 40 hours, but part-time or non-standard schedules should use the actual average weekly hours.

Step 2: Use the standard formula

The basic calculation is:

Hourly Rate × Hours per Week × 52 Weeks = Annual Salary

For example, an employee earning $25 per hour and working 40 hours per week would have an annualized salary of $52,000 ($25 × 40 hours × 52 weeks).

Other examples:

$16/hour × 40 hours × 52 weeks = $33,280/year
$40/hour × 40 hours × 52 weeks = $83,200/year
For part-time: $25/hour × 20 hours × 52 weeks = $26,000/year.

This calculation does not include vacation, sick leave, or holidays. These should be considered part of your overall compensation philosophy, rather than being part of the raw formula.

Step 3: Account for overtime history (if applicable)

If the employee regularly earns overtime as an hourly worker, factor this into the new salary. Failing to do so may unintentionally result in a reduction of total compensation. Review historical pay to ensure the new salary reflects typical earnings, including overtime.

Step 4: Assess exempt vs. non-exempt classification

Check whether the new role meets the criteria for exempt status. Exempt employees must satisfy both a salary threshold and specific job duties, as defined by local laws such as the Fair Labor Standards Act (FLSA) in the United States. If the employee remains non-exempt, they are still entitled to overtime pay, even if they are paid a salary.

Step 5: Adjust payroll systems

Update the employee’s classification and pay structure in payroll and HRIS systems. Confirm that benefits eligibility, paid time off accruals, and tax reporting align with the new status. Accurate records help prevent errors and ensure payroll compliance during conversions.

Following these steps helps employers confidently convert hourly pay to salary, supporting both business needs and employee satisfaction.

Legal considerations for employers

Converting hourly employees to salaried roles requires careful adherence to labor laws to avoid costly penalties and ensure fair treatment of employees. Below are key legal factors employers must address.

FLSA salary thresholds (U.S.)

In the U.S., exempt salaried employees must meet the FLSA’s salary threshold, which reverted to $684 per week ($35,568 annually) after a 2024 court ruling blocked planned increases. Employers must also ensure roles meet the FLSA’s “job duties test” for exemptions (e.g., executive, administrative, or professional responsibilities). Some states, such as California and New York, have higher salary thresholds; therefore, multinational employers should verify local standards.

While wages often define exemption status, “job duty is perhaps the most essential test of whether a job is exempt or non-exempt,” advises Elizabeth J. McInturff, an experienced civil litigator and business attorney. “In general, employees performing primarily executive, professional, or administrative duties are classified as exempt employees. Under FLSA, primary duty is defined as the principal, main, major, or most important duty that the employee performs.”

Overtime eligibility and state-specific rules

Non-exempt salaried employees remain eligible for overtime pay. Federal law mandates overtime for hours worked beyond 40 per week, but states like Kansas (46 hours) and Minnesota (48 hours) set higher weekly thresholds.

Daily overtime rules in Alaska, California, Colorado, and Nevada require extra pay for working more than 8 or 12 hours in a day. For example, California mandates double pay for hours beyond 12 in a single workday.

Notice requirements for pay changes

While federal law doesn’t require advance notice for pay structure changes, many states and localities do. For instance:

New York mandates seven days’ written notice before reducing wages.
Missouri requires written notice at least 30 days before the effective date of a wage reduction.
Maine employers must provide notice at least one working day in advance of the change.

Global employers should consult local regulations to avoid disputes or fines. Pay changes are often contingent on job responsibilities. So while “employers can intentionally change employees’ classifications,” McInturff says, “an employer cannot simply change an employee’s status on a whim. If the employee is not getting a new job title, the employer must show why the primary duties of the job have changed.”

Risk of misclassification

Misclassifying employees as exempt when they don’t meet the criteria can lead to severe penalties, including:

Fines. Up to $1,000 per worker and repayment of unpaid taxes in the United States.
Legal action. Class-action lawsuits or criminal charges for intentional violations.
Global repercussions. Mexico and Australia impose additional fines and benefit repayments.

Additionally, “employers considering reclassifying employees must note that this change cannot be done retroactively,” McInturff adds. “Employees are entitled to written notice of the change in their classification and the implications it has.”

By addressing these considerations, employers can mitigate risks while maintaining compliance across jurisdictions.

Pros and cons of converting hourly employees to salary

Switching employees from hourly to salary status can offer significant advantages for both employers and employees, but it also introduces new challenges. Understanding the complete picture helps organizations to make informed decisions that support business goals and workforce satisfaction.

Pros

Simplifies payroll and scheduling. Salaried pay structures eliminate the need to track exact hours worked, reducing administrative tasks and streamlining payroll processing.
Predictable budgeting for compensation. Fixed salaries enable organizations to more accurately forecast labor costs and plan long-term budgets, thereby minimizing surprises from fluctuating overtime or variable work hours.
Enhances perceived career progression. Employees often view salaried roles as a step up, associated with higher status, greater responsibility, and more opportunities for advancement within the company.
Streamlines overtime tracking. For exempt roles, employers do not need to calculate or pay overtime, which simplifies compliance and reduces the risk of payroll errors.
Improves employee retention. Offering a salary and benefits package can attract and retain talent seeking stability and long-term growth, reducing turnover and associated hiring and employee costs.
Access to broader benefits. Salaried employees are more likely to receive additional benefits such as health insurance, retirement plans, and paid time off, making the roles more attractive.

Cons

Must ensure compliance with exemption laws. Employers must verify that roles meet the legal criteria for exempt status; missteps can result in costly penalties and back pay obligations.
Risk of misclassification penalties. Incorrectly classifying employees as exempt when they do not meet the requirements can result in fines, lawsuits, and reputational harm.
May require renegotiation of job expectations. Employees transitioning to a salary may face changes in their duties, schedules, or expectations, which can lead to confusion or dissatisfaction if not clearly communicated.
Can impact morale if not properly communicated. If employees feel they are losing overtime opportunities or flexibility, morale may drop, especially if the change is not explained transparently.
Potential for increased workload without additional pay. Salaried employees may be expected to work beyond standard hours without extra compensation, which can lead to burnout or decreased job satisfaction.
Higher employer costs for benefits and taxes. Salaried roles often come with expanded benefits packages and increased tax obligations, which can increase overall compensation costs for the organization.

Best practices for employers

Successfully converting hourly employees to salaried roles is more than just a pay adjustment; it requires a comprehensive approach. Following best practices helps ensure compliance, transparency, and employee satisfaction throughout the process.

Clearly communicate changes to employees (in writing). Provide detailed written communication explaining the new pay structure, effective date, and how the change will impact compensation and benefits. This transparency builds trust and reduces confusion.
Align compensation with market benchmarks and responsibilities. Use salary benchmarking to ensure the new salary is competitive and reflects the employee’s role, experience, and market standards. Regularly review and update salary bands to maintain fairness and attract top talent.
Consider offering flexible hours or enhanced benefits. To offset the loss of overtime pay, provide flexible scheduling, remote work options, or additional benefits such as extra paid time off or wellness programs. These perks can help maintain morale and support work-life balance.
Document the change and maintain a paper trail for compliance purposes. Create a formal record of the change, including a signed letter from the employee acknowledging the new pay structure and classification. Keep these records for compliance with labor laws and to address any future disputes.
Incorporate recent raises or pay adjustments. When calculating the new salary, include any recent raises or adjustments to ensure the employee’s compensation accurately reflects their current value and performance.
Update payroll and HR systems promptly. Adjust payroll, HRIS, and timekeeping systems to reflect the employee’s new status. Confirm that benefits eligibility, PTO accruals, and tax reporting are updated to prevent administrative errors and ensure a seamless transition.

Ensure compliant compensation with Velocity Global

Velocity Global’s Employer of Record (EOR) services and global payroll solutions take the guesswork out of managing compensation for employees and contractors worldwide. We offer expert guidance, integrated technology, and in-country compliance support that enables organizations to confidently hire, pay, and manage talent across borders while staying compliant with local laws. Let us handle the complexities of payroll and employment so you can focus on growing your business. Contact us to learn more.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

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