CHAPTER 2

COMPUTING & PAYING WAGES COMPUTING & PAYING WAGES AND SALARIESAND SALARIES

Payroll Accounting 2006 Bernard J. Payroll Accounting 2006 Bernard J. BiegBieg

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Fair Labor Standards Act [FLSA]

Federal Wage & Hour Law provides for two types of coverage

Enterprise Coverage All EE of interstate commerce And $500,000 or more annual gross sales

OR Individual Coverage

EE whose company may not meet enterprise coverage, but are in a fringe occupation are covered individually

for example packaging corp. with annual revenues = $225,000

Plus many nonprofits (schools, public agencies, etc.)

Many family businesses are exempt!

Employee & Employer Defined

An employer is an individual who “acts directly/indirectly in the interest of an employer” in relation to an employee

An individual is an employee if he/she performs services in a covered employment Common-law

FLSA & Domestic Help

Domestic help includes nannies, gardeners, chauffeurs, etc.

These employees must earn minimum wage and overtime if they: work more than 8 hours/week or earn $1,000 in a calendar year

“Live-in” help need not be paid overtime

Includes all rates of pay including, but not limited to: Commissions Bonuses and severance pay On-call or differential

Exceptions to minimum wage – FT students employed at their own university - 85% Student learners at Vocational Technical school - 75% Retail or service establishments and farms employing FT students - 85% Physically or mentally impaired employees with certification

*Minimum wage is very different from ‘living wage’. Over 100 cities and counties now have local ordinances mandating employers who have local government contracts pay a wage to their employees at an amount minimally necessary to live on.

What is Minimum Wage?

Tipped Employees

o “Tipped employee” regularly averages $30/month in tips o Small Business Job Protection Act froze minimum tipped wages

at $2.13/hour, o EE still must make $5.15/hour when combining tips/wages (5.15

x 40 = $206 minimum weekly gross)o ER gets credit for tips received between $2.13 and $5.15

o Examples of tips received for 40-hour work week#1. Reported tips = $43

o Is $85.20* (minimum tipped wages) + $43 > $206 o No - ($206 - 43 = $163) so ER must pay additional wages ($163 - 85.20)

#2. Reported tips = $1189 o Is $85.20 + $1189 > $206o Yes - so ER pays $85.20 wages

#3. Reported tips = $111o Is $85.20 + 111 > $206o No - ($206 - 111 = $95) so ER must pay additional wages ($95 - 85.20)

*40 hours x $2.13/hour =

$85.20

40 Hour Work Week Established by corporate policy (for example 12:01

a.m. Saturday - 11:59 p.m. Friday) Seven consecutive 24-hour periods

Some states require daily overtime (OT) over 8 hours not FLSA

FLSA sets OT at 1.5 times regular pay Exception 1 - Hospital EE, overtime for 80+ hours in 14 days Exception 2 - EE receiving remedial education Exception 3 - Retail workers earning commission (special rules) Exception 4 - Emergency public safety EE

can accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT

Exception 5 - EE of state or interstate governmental agency – can accumulate 160 hours x 1.5 = 240 hours compensatory time instead

of OT

Exempt vs. Nonexempt

Putting someone on salary doesn’t mean they’re exempt!!

“Exempt” means exempt from overtime provisions of FLSA

White-collar workers Executives Professional Administrative Highly compensated employees Computer professionals Outside sales ($455/week doesn’t apply)

Test of exemption Employee must be paid on salary basis Must meet “primary duty” requirements

see Figure 2-2 in text

To be considered exempt, must be

paid at least $455/week

Child Labor Laws

Under age 16 cannot work in construction, mining, manufacturing, etc.

Under age 18 cannot work in hazardous jobs Under 16 years old limited to employment in retail and

food/gas service: only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer) 3 hours per day - 18 hours per week – school year 8 hours per day - 40 hours per week – summer

In agricultural occupations an employee as young as 10 can work only from 6/1 - 10/15

Hand harvest laborers outside school hours only subject to many strict limitations ER needs to have certificate of age on file

Violations can result in up to $10,000/offense

What the FLSA Does Not Cover

Employers are not required to Pay extra for weekend/holiday work Pay for holidays or vacation Grant vacation time Limit hours for persons 16 years of age or

over

Compensable vs. Noncompensable Time

o Travel (when part of principal workday) is compensableo Training (when for ER benefit/required) is compensableo Rest periods under 20 minutes are compensable (can’t

make EE “check out”)o Prep at work station (but not clothes changing, shower) is

compensableo Meal periods are not considered compensable unless

employee must perform some tasks while eatingo On call time is not compensable if employee can spend

time as he/she chooseso Work at home is compensable if nonexempt employeeo Sleep time is compensable if required to be on duty less

than 24 hourso Preliminary/postliminary activities

o Not compensable unless required by contract/custom

Timekeeping FLSA requires employers to retain time/pay records Employer in traditional office environment can use

Time sheet Time cards Computerized time/attendance records

card-generated systems (computerized totals) badge systems (microchips or bar codes) cardless/badgeless system - EE enters PIN PC-based system

Employer in nontraditional office environment can use Touch screen technology (PC screen reads touch input) Internet Wireless transmission (cell phones, personal digital assistants [PDAs]) Biometrics - iris scan, finger print or some other unique characteristic to

ensure security

Pay Periods

Biweekly (26) - same hours each pay period Semi-monthly (24) - different hours each pay

period Monthly (12)- different hours each pay period Weekly (52) - same hours each pay period

ER can have different pay periods for different groups within same company!

Steps to Follow when Calculating Gross Pay

Annualize Salary Calculate “regular” gross Calculate hourly pay Calculate OT rate (1.5 x hourly rate) Add overtime pay to “regular” gross

Example #1 - Calculating Gross Paycheck

FACTS: Salary quoted is $1,500/month - paid weekly - 43 hours in one pay period

$1,500 x 12 = $18,000 annual $18,000/52 = $346.15 weekly gross $18,000/2,080 hours = $8.65 regular rate $8.65 x 1.5 = $12.98 OT rate ($12.98 x 3) + $346.15 = $385.09 gross

FACTS: Salary quoted is $2,000/month – paid semimonthly - 4 hours OT in one pay period

$2,000 x 12 = $24,000 annual $24,000/24 = $1,000 semimonthly gross $24,000/2080 = $11.54 regular rate $11.54 x 1.5 = $17.31 OT rate ($1,000) + ($17.31 x 4) = $1,069.24 gross

Example #2 - Calculating Gross Paycheck

FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly. Two rates in addition to semimonthly gross [regular pay between 38-40 hours/week; 1.5 after 40 hours]. Of 16 hours of OT in one pay period only 12 over 40.

$2,000 x 12 = $24,000 annual $24,000/24 = $1,000 semimonthly gross $24,000/ (38 x 52)* = $12.15 regular rate $12.15 x 1.5 = $18.23 OT rate $1,000 + (4 x $12.15) + (12 x $18.23) = $1267.36 gross *Denominator is always number of hours in full time year [may be different

between companies]

Example #3 - Calculating Gross Paycheck

FACTS: Salary quoted is $1,600/month for 35 hour work week -paid semimonthly. OT is calculated as regular hourly pay between 35-40 hours/week; 1.5 after 40 hours. Of 16 hours of OT in one pay period, 6 hours are over 40 hours weekly.

$1,600 x 12 = $19,200 annual gross $19,200/24 = $800 semimonthly gross $19,200/(35 hours x 52 weeks) = $10.55 regular

rate $10.55 x 1.5 = $15.83 OT rate $800 + ($10.55 x 10) + ($15.83 x 6) = $1000.48

gross

Example #4 - Calculating Gross Paycheck

FACTS: Salary quoted is $2,200/month - paid biweekly - 11.5 hours OT in one pay period

$2,200 x 12 = $26,400 annual $26,400/26 = $1,015.38 each biweekly pay

period $26,400/2080 = $12.69 regular rate $12.69 x 1.5 = $19.04 OT rate $1,015.38 + (11.5 x $19.04) = $1,234.34

gross

Example #5 - Calculating Gross Paycheck

Salaried Employees - Fluctuating Workweek

Some employees may work a fluctuating schedule on a fixed salary Not applicable to hourly employees

Employee must agree to this system Overtime is calculated by dividing normal

salary by total hours worked Then an extra .5 rate is paid for all hours

worked over 40 Not allowed in all states

Piece Rate

FLSA requires piecework earners to get paid for nonproductive time

Must equal minimum wage with OT calculated one of two ways:

Method A units produced x unit piece rate = regular earnings regular earnings/total hours = hourly rate hourly rate x 1/2 = OT premium regular earnings + (OT premium x OT hours) = gross pay

orMethod B

(units produced in 40 hours x piece rate) + (units produced in OT) x (1.5)(piece rate)

Example #1 - Calculating Piece Rate Gross Pay

FACTS: 4,812 units inspected in a 47.25 hour week (600 of those units produced in extra hours). Employee is paid .12 per unit. Calculate gross using both methods.

Method A (4,812 x .12) = $577.44 regular piece rate earnings 577.44/47.25 = $12.22 hourly rate $12.22 x .5 = $6.11 OT premium $577.44 + ($6.11 x 7.25 hrs.) = $621.74 gross

Method B (4,212 x .12) + [600 x (.12)(1.5)] = $613.44 gross

FACTS: Inspection rate = $.08/unit. An EE inspected 6897 units in 43.5 hours. She inspected 423 of these in overtime. Calculate using both methods.

Method A (6897 units x .08) = $551.76 regular piece rate

earnings $551.76/43.5 hours = $12.68 hourly rate $12.68 x .5 = $6.34 OT premium $551.76 + (6.34 x 3.5) = $573.95 gross

Method B (6474 x .08) + (423 x .08 X 1.5) = $568.68 gross

Example #2 - Calculating Piece Rate Gross Pay

Special Incentive Plans

Some piece rates systems may be modified to entice workers to produce more

Computation of payroll is based on differing rates for differing quantities of production

Example: .18/unit for units inspected up to 2000 units/week .24/unit for units inspected between 2001-3500

units/week .36/unit for units inspected over 3500 units/week

Commission

Commission can be used in many combinations (with base salary or stand alone) - as long as minimum wage provisions are met

FACTS: Sam sold $40,000 of product. His quota is $31,500. He gets 2% in excess of quota. His annual base salary is $30,000. He gets paid biweekly

$30,000/26 = $1153.85 base earnings (8500 x .02) = $170 commission $1153.85 + 170.00 = $1323.85 gross

Profit-Sharing Plans

Profit Sharing Plans EE shares in corporate profits – receives his/her share

in the form of Cash payment Profits distributed into retirement or savings

account Profits distributed as stock

These payments must meet standards established by Department of Labor