Salary vs. Hourly in New York: What Every Small Business Owner Needs to Know
Whether you're hiring your first employee or your tenth, one of the most consequential decisions you'll make is how to pay them. How much you pay matters, and so does which pay structure you choose. In New York, that decision carries real legal weight, and getting it wrong can cost you far more than the payroll savings you thought you were protecting.
Here's what you need to know before you commit to either.
The Basics: What's the Difference?
A salaried employee receives a fixed amount each pay period, regardless of how many hours they work. A salary arrangement is generally associated with employees who are classified as exempt, meaning they are not entitled to overtime pay under federal or New York law.
An hourly employee is paid for every hour worked and is typically classified as non-exempt. That means they are entitled to overtime at 1.5 times their regular rate for every hour beyond 40 in a workweek.
Simple enough in theory. In practice, the line between the two classifications, and the consequences for misclassifying someone, is where most employers run into trouble.
1. New York Has Its Own Rules (and They're Stricter Than Federal)
Most employers are familiar with the federal Fair Labor Standards Act (FLSA), which sets baseline requirements for minimum wage, overtime, and exempt status. New York employers need to layer state law on top of that, and when the two conflict, employees get whichever standard is more favorable to them.
For 2026, New York's minimum hourly wage is:
$17.00/hour in New York City, Long Island, and Westchester County
$16.00/hour in the rest of the state
For an employee to be exempt from overtime under New York's executive and administrative exemptions, they must earn:
At least $1,275/week in NYC, Long Island, and Westchester
At least $1,199.10/week in the rest of New York State
Compare that to the current federal minimum of $684 per week. In 2024, the Biden administration attempted to raise that federal floor significantly, first to $844 per week and then to $1,128 per week. A federal court vacated that rule in November 2024, and in May 2026 the Trump administration formally rescinded it, restoring the $684 per week threshold that had been in place since 2019. The federal floor is now lower than ever relative to New York's requirements, making it even more important for New York employers to focus on state law rather than federal minimums.
Meeting the salary threshold alone is insufficient. The employee must also satisfy a specific "duties test" based on the nature of their role.
2. The DOL's Three-Part Test: How Exempt Status Is Actually Determined
Before landing on salary vs. hourly, it helps to understand the framework the Department of Labor uses to evaluate whether a salaried employee even qualifies for an overtime exemption. Contrary to what many business owners assume, this determination does not come from the IRS. It comes from the DOL, which applies a three-part test under the FLSA.
Part One: The Salary Basis Test. The employee must be paid a predetermined, fixed salary that does not fluctuate based on hours worked or the quality of work performed. If an employer docks pay for partial-day absences or slow weeks, the employee may lose exempt status for that entire pay period.
Part Two: The Salary Level Test. The employee must earn at least the applicable minimum weekly salary. For New York employers, that means meeting New York's thresholds, which are substantially higher than the federal floor and vary by region as outlined above.
Part Three: The Duties Test. The employee's actual job responsibilities must qualify under one of the recognized exempt categories: executive, administrative, or professional. All three parts must be satisfied simultaneously. Passing two out of three is not enough.
The IRS does have its own worker classification test, but that framework addresses whether a worker is an employee or an independent contractor. Once you have established someone is an employee, the DOL's three-part test governs whether they are exempt from overtime.
3. Salary Does Not Automatically Mean Exempt
This is one of the most common misunderstandings we see. Paying someone a salary does not automatically make them exempt from overtime. New York law requires both a minimum salary and that the employee primarily performs executive, administrative, or professional duties, commonly referred to as "EAP" roles, as defined under N.Y. Comp. Codes R. & Regs. Title 12, Section 141-3.2.
Executive employees are those whose primary duty involves managing the business or a department within it, who regularly direct the work of other employees, and who have meaningful authority over hiring and firing decisions. Simply giving someone a manager title falls short. The actual day-to-day responsibilities have to reflect genuine management authority.
Administrative employees qualify when their primary duty involves office or nonmanual work that is directly related to the employer's management policies or general operations, and when they regularly exercise real discretion and independent judgment. An employee who processes routine tasks under close supervision, regardless of their job title, will likely fall outside this category.
Professional employees are exempt when their primary duties require advanced knowledge in a specialized field of science or learning, or involve original and creative work in a recognized artistic field. The work must call for the consistent exercise of discretion and judgment, and be predominantly intellectual in nature.
Across all three categories, New York courts and the Department of Labor look at actual job responsibilities, not job titles. An employee whose duties do not genuinely fit one of these categories remains entitled to overtime, even if their pay is structured as a fixed weekly or annual salary.
Misclassification in New York is taken seriously. Under the New York Labor Law, employees have six years to bring a wage claim, and a successful claim can include 100% liquidated damages on top of the unpaid wages.
4. When Hourly Makes More Sense
For many small businesses, hourly pay is the smarter, more flexible option, particularly when:
The role has variable or seasonal hours
You're not yet ready to guarantee consistent weekly hours
The position doesn't meet the duties test for exemption
You want accountability tied directly to time worked
The tradeoff is unpredictability. Hourly payroll fluctuates with hours worked, and if overtime is common in your operation, those costs can add up quickly. Building in clear overtime approval processes is worth doing from day one.
5. When Salary Makes More Sense
Salaried arrangements tend to work best for roles with:
Consistent, defined responsibilities
A workload that doesn't vary significantly week to week
A level of autonomy that makes hour-tracking impractical
Duties that squarely meet one of the exempt categories
From a business standpoint, salary simplifies payroll, supports retention, and signals a long-term investment in that employee. It also means that person's pay remains the same even during slow weeks, and you've taken on benefits obligations that typically come with full-time salaried positions.
The simplicity of a salary can be tempting, but misclassifying someone to avoid overtime carries significant liability exposure in New York.
6. New York's Wage Theft Prevention Act Applies to Both
Regardless of which structure you choose, the Wage Theft Prevention Act (WTPA) requires New York employers to provide written notice to employees at the time of hire about their pay rate, pay day, and whether they're being paid hourly or by salary. That notice must be signed and retained by the employer.
If you've been relying on verbal agreements or offer letters that don't check all the statutory boxes, this is worth revisiting.
Bottom Line
In New York, the salary vs. hourly decision is a legal one as much as it is a business one. The wrong classification, an outdated offer letter, or a threshold you didn't know had changed can expose your business to wage claims, audits, and penalties that far outweigh any short-term convenience.
At MJ Morley Law, we help New York small business owners build employment structures that hold up: compliant offer letters, classification audits, and clear pay policies that protect your business as it grows.
Have questions about your current pay structure? Reach out to us today to get started.
ABOUT MJ MORLEY LAW PC
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