Hourly or Salary? Advantages/Disadvantages on Financials & company culture?

I'll preface this by stating clearly that while I am very familiar with this area of the law--I have over 15 years of experience handling HR issues--I am NOT an attorney. You would do well to consult one with regard to this and any other question on employment law. With that said, this is not like deciding on a paint color for your offices--you are required to comply with federal law.

Employee classification is governed by the Fair Labor Standards Act (FLSA), and failure to properly classify employees is one of the more frequent violations of employment law. The Labor Department's proposed budget is a sizeable increase over last year's budget, and most of that money is earmarked for enforcement--so disregard at your own risk.

Under the FLSA, employees are classified based upon the actual work they perform--not their job title, or even their job description--rather, their actual duties. Generally speaking, supervisors, managers, executives, function leaders, and other individuals who function independent of general supervision and whose primary contributions are intellectual rather than tactical are classified as Exempt (salaried) employees. All others generally fall into the Non-exempt (hourly) category. Of course, it can be a little more complicated depending on the specifics of each situation, but following those general guidelines should keep you in compliance with the law.

I would be happy to provide more specific guidance if you would be interested in setting up a call.

Labor law notwithstanding (you should always comply with the law and seek qualified guidance in that arena), I'll comment on the financial and cultural implications from my experience.

Financial -- I have run firms with both 100% payroll and 100% contractors. In other words, W-2 vs. 1099. My first company had eight professional services practitioners on payroll. The challenge here was always have to match business development and cash flow to the required payroll cycle. Whether or not you sold enough gigs you were going to have to make payroll. I found that every business has seasonality and that cash flow can be severely squeezed if you don't plan for that. For example, it's very likely that professional services revenues will drop on average in December and January because of budgets and the slowdown for the holidays (at least in the US). You need to plan for all of that.

Cultural -- In my experience there is an over-weighted emphasis put on the connection between full time employees and culture. I have discovered over time that you don't have to have full timers to have them contribute to culture. It really depends on the culture you want to create. People on salary are incentivized in different ways than people on contract. People are contract, in my experience, are going to be hungrier because their performance depends on their working. Also, it's easier to remove someone on contract than someone on payroll. There are all kinds of implications around training, retention, etc. that also need to be considered.

Contractors simply give you more flexibility and I personally think you can build a great culture of people who are not tied to your payroll.

Happy to discuss with you to offer more personalized perspectives.