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Should You Pay Employees an Hourly Wage or a Salary?

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This story appears in the July 2014 issue of Entrepreneur. Subscribe »

This subject is covered by the Fair Labor Standards Act of 1938 (FLSA) and its accompanying regulations. The law spells out, among other things, minimum wages, rules about determining hours worked and the definitions and treatment of nonexempt and exempt employees for overtime pay.

Overtime, in fact, is one of the critical considerations in determining how to pay your staff. Nonexempt employees--typically those who get an hourly wage--must be paid overtime when they work more than 40 hours per week. Exempt employees do not receive overtime. (We commonly call these salaried employees, but the kicker is that even some salaried employees may actually be considered nonexempt and subject to overtime pay.) To make matters even more confusing, each state has its own "wages and hours" laws, and they're usually more stringent than the FLSA's requirements.

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