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