Hourly Rate vs Annual Salary: Which one is better?

Deciding whether to pay employees an hourly rate or an annual salary is one of the biggest pay structure questions for business owners.

On the surface it seems straightforward, but the choice impacts more than just payroll - it affects compliance with Fair Work, your labour costs, and even how your team shows up at work.

Get it right, and you’ll set up a pay system that’s fair, compliant, and aligned with how your business runs.

Get it wrong, and you could face underpayment risks, unnecessary admin, or a workforce that feels disengaged.

In this article, we’ll break down the pros and cons of an hourly rate vs annual salary pay, when each option makes sense, and the compliance traps to avoid - including how the BOOT test (Better Off Overall Test) applies to salaried employees.

Hourly Rate vs Annual Salary: What's The Difference?

At first glance, it seems simple:

• Hourly rate means you pay staff for every hour worked. This includes penalties, overtime, and loadings (e.g., weekends or public holidays) if required by their award.

• Annual salary is a fixed yearly amount, split into regular pay periods. Salaries often assume a 'reasonable' amount of extra hours is included in the pay, and can often include things like Annual Leave loading.

But it’s not just about money. The choice affects workplace culture, employee expectations, compliance with Fair Work, and even how much admin you’ll need to manage.

When Hourly Pay Works Best

Hourly rates are common in retail, hospitality, trades, and other shift-based or casual roles. They’re especially useful if you:

• Need flexibility in staffing hours.

• Have workloads that change from week to week.

• Want to keep a clear boundary around paid time.

• Must comply with an award that specifies hourly rates and loadings.

Pros of hourly pay:

• You only pay for hours actually worked.

• Easier to manage casual and part-time arrangements.

• Employees earn extra for nights, weekends, or overtime.

• Clear visibility of labour costs.

Cons of hourly pay:

• Can create a 'clock-watching' mentality.

• More admin, especially if you’re manually tracking hours.

• Harder to build loyalty and long-term commitment.

👉 Tip: Hourly rates can work really well when the work is task-based and the expectations are crystal clear. But the moment roles start to include broader responsibilities, or require self-management, hourly pay can feel limiting, both for you and the employee.

When Salaries Are the Smarter Option

Salaries usually suit professional, office, or leadership roles where consistency and accountability matter. Think managers, operations, HR, marketing, or admin staff.

Pros of salaries:

• Predictable payroll costs.

• Employees are more likely to 'own' their role and outcomes.

• Less admin - no chasing timesheets and calculating overtime every week.

• Creates a sense of stability and trust.

Cons of salaries:

• Risk of burnout if hours aren’t monitored and expectations are unclear.

• Can lead to complacency if performance isn’t managed.

• May be non-compliant if the salary doesn’t meet minimum entitlements under the award, and therefore lead to underpayments.

  
  

⚠️ Important:  Just because someone is on a salary doesn’t mean you can ignore overtime, breaks or allowances. If an employee is covered by a Modern Award, you still need to ensure their salary compensates them fairly for the hours they work. Their salary must still leave them 'better off overall' than if they were paid hourly (otherwise known as the BOOT test).

The BOOT Test Explained (Better Off Overall Test)

This is where many businesses trip up: the BOOT test.

The BOOT test is a Fair Work requirement that ensures employees on a salary are better off overall compared to what they would earn under their award on an hourly basis.

How it works:

1. Work out what the employee would earn if you paid them strictly by the award (including hourly rates, and a realistic amount for penalties, overtime, allowances and loadings).

2. Compare that figure with the proposed salary.

3. The salary must equal or exceed the award amount over the same period.

If the salary falls short, even occasionally, you could be breaching the award and underpaying staff.

👉 For example: If a hospitality manager is on a $65,000 salary but regularly works nights and weekends, you’d need to check that their total pay still comes out higher than if you paid them an hourly rate under the Hospitality Award with penalties, etc. If not, the salary needs adjusting.

Best practice:

• Do a BOOT check when you first set the salary.

• Review it annually when awards update (usually 1 July each year).

• Keep records showing how you calculated compliance (this protects you if Fair Work audits you).

• Keep an eye on the hours actually being worked to make sure they don't exceed what you've allowed for in the salary.

A Hybrid Approach: The Best of Both Worlds

It doesn’t always have to be one or the other. Many businesses use a hybrid model, for example:

• Paying hourly during a probation or trial period, then moving to salary once the role and expectations are better defined. This gives both you and the employee time to figure out the real scope of the job, how many hours it actually takes, and whether a fixed salary will offer the right balance.

• You can also salary roles that have stable hours and then offer hourly pay for occasional additional tasks, projects or peak periods. The key is clear documentation and good communication.

  
  

Compliance Check: What to Watch Out For

If you decide to go with annual salaries, make sure you:

• Check the applicable award and confirm whether the salary absorbs penalties or allowances

• Document this clearly in the employment contract

• Keep records showing the salary still leaves the employee “better off overall”

• Review salaries at least once a year to stay aligned with award updates

If you choose hourly rates, ensure:

• Start and finish times are tracked accurately

• Breaks and loadings are applied correctly

• Overtime is pre-approved and documented

Set it up properly once (ideally with a simple payroll system), and the admin becomes much easier.

So, Hourly or Salary - Which One Is Better?

There’s no one-size-fits-all answer. It really depends on the role, the person, and your business model.

• Use hourly pay when flexibility and clear time boundaries matter.

• Use salaries when consistency, ownership, and long-term commitment matter.

• Consider a hybrid if you need both.

When deciding, ask yourself:

• How predictable are the hours for this role?

• Does the work require initiative, flexibility or ownership?

• Is the job casual or ongoing?

• Do I have systems in place to track hours if needed?

Your answer will usually become clearer from there.

Bottom line: Hourly rates give you flexibility. Salaries give you stability. Both can work well if you set clear expectations, follow Fair Work rules, and apply the BOOT test to keep pay fair and compliant.

If you're not sure and would like some guidance, we can help.

Book a free discovery call today. Let’s make managing HR the least of your worries. 

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Need help? Contact us today - sandra@hrconsultingtas.com.au or 0408 408 225  

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