In the companies that I've worked at that employed musicians, they were lumped in with audio engineers -- i.e. you're expected to be able to record a guitar riff, compose a piano track, and synthesize beeps and bloops and ker-chunks. That's a regular full-time job with the same office hours (or same negotiations for telecommuting) as everyone else in the office.

That was a regular salaried office job, the same as a programmer or artist or administrator. n.b. all of these people have the ability to negotiate to work from home.
If they were being paid for an outcome, they'd likely be contractors, not employees (at least that's how it works in Australia).

At another company where I worked, they didn't have enough work to justify hiring a full-time audio employee, so they contracted all their audio work to an individual, who received a negotiated payment for a specific outcome.

Every in-house job I've held was salary. And Hodgeman is exactly right - the job entailed everything audio, from sound design to voice overs to music and implementation. It also included pre-production and production meetings with other depts. I was always required to work mostly on-site but at one company I had a nicer audio set up than they did. Once my boss got to know and trust me he'd often tell me to work from home if we needed a certain style of music that my home rig did better than the office rig. Most companies, at least at the start, will want you on-site. It can also present a licensing issue if employee A is producing company material on their own set up - but not all companies are concerned with this issue.

A trade off to working in-house is that everything you produce on company time and hardware is theirs. Even if they don't use it in the game - they own it. Some companies can be really laid back if you ask for unused cue X (usually the medium to smaller sized ones) but the larger ones can be more of an issue. When you work as a contractor, especially when you're completely off-site, this is less of an issue since you own the hardware/software and most freelancing contracts do not claim to own anything and everything you produce. If they do - either don't sign or charge 50X more than your usual rate!

As far as which is more common - I'd say the later these days. I know more freelancing, off-site composers than I do in-house.

For companies doing large games, it's more common to have an in-house (sometimes called "FTE"--Full Time Employee), salaried Audio Director who will then contract out major composition. I.e. ArenaNet will contract out to Jeremy Soule for GW2..That said, the clever Audio Directors manage to sneak in some compositional work of their own...

For companies who do mainly smaller games, you might be more likely have an FTE for composition and sound design, and only go to contractors if you get overflow; some of my contracting work is exactly that-- they're big companies and they have FTE composers, but the workload is sometimes more than they can handle.

And then there are companies of big games who like to do everything with FTE's if at all possible. Bungie comes to mind here; pretty much all their composition is done by in-house FTE's, largely working on-site(with the exception of Paul McCartney, who I presume is working as a contractor ;-))

If you're an FTE, you're generally expected to show up normal-ish work hours, particularly if the developer has a well equipped studio. It'd be pretty rare to be an FTE and spend 4 of 5 days working at home, unless you've built up a pretty stellar reputation in that company.

Brian Schmidt
GameSoundCon