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CHAPTER 2

0. Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland. CHAPTER 2. COMPUTING WAGES & SALARIES. Developed by Lisa Swallow, CPA CMA MS. 0. Fair Labor Standards Act [FLSA]. Federal Wage & Hour Law provides for two types of coverage Enterprise coverage includes all EE if

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CHAPTER 2

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  1. 0 Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland CHAPTER 2 COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS

  2. 0 Fair Labor Standards Act [FLSA] Federal Wage & Hour Lawprovides for two types of coverage • Enterprise coverage includes all EE if • Two or more work in interstate commerce and • $500,000 or more annual gross sales or produce goods for interstate commerce • Plus many nonprofits (schools, public agencies, etc.) regardless of annual sales volume • OR • Individual employee coverage • EE whose company may not meet enterprise coverage, but are in a fringe occupation • For example: drive for fleet that transports goods, but annual revenues = $225,000 Manyfamily businesses are exempt!

  3. 0 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 • IRS test based on • Behavioral control • Financial control • Relationship between two parties • Statutory nonemployees considered self-employed • Direct sellers and licensed real estate agents

  4. 0 FLSA & Domestics • Domestic help includes nannies, gardeners, chauffeurs, etc. • These employees must earn minimum wage and overtime if: • Work more than 8 hours/week or if • Earn at least $1,000 in a calendar year • Live in domestics need not be paid overtime

  5. 0 What is Minimum Wage? • Includes all rates of pay including, but not limited to • Commissions • Bonuses and severance pay • On-call or differential • Exceptions to minimum wage • Training wage for first 90 calendar days of employment for newly hired EE under age 20 • Retail or service establishments and farms employing FT students - 85% • FT students employed at their own university - 85% • Student learners at Vocational/Technical school - 75% • Physically or mentally impaired employees with certification

  6. Minimum Wage vs. Living Wage • Minimum wage • $6.55 until July 24, 2009 then to • $7.25 [This text uses $7.25 in all calculations!] • Living wage • 100+ cities have local laws requiring Employers that do business with government to pay a ‘living wage’ • Attempts to keep working poor’s wages on track with cost of living

  7. 0 Tipped Employees • “Tipped employee” regularly averages $30/month in tips • Small Business Job Protection Act froze minimum tipped wages at $2.13/hour, therefore tip credit = $5.12/hour • EE still must make $7.25/hour when combining tips/wages (7.25 x 40 = $290 minimum weekly gross) • Examples of tips received for 40-hour work week • #1. Reported tips = $43 • Is $85.20* (minimum tipped wage) + $43 > $290 • No - ($290 - 43 = $247) so ER must pay additional wages • #2. Reported tips = $1189 • Is $85.20 + $1189 > $290 • Yes - so ER pays $85.20 wages • #3. Reported tips = $111 • Is $85.20 + $111 > $290 • No - ($290 - 111 = $179) so ER must pay additional wages *40 hours x $2.13/hour = $85.20

  8. Tipped Employee Rules • Credit card tips must be paid out to the employee by the next payday • If employee works more than one job, tip credit can only be applied to job that qualifies as ‘tipped’ • If a state’s tip credit differs from the federal tip credit, employer must calculate and pay their employees the higher cash wage • Tip credit is same in overtime hours ($5.12/hour)

  9. 0 Overtime Provisions & Exceptions • 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 • FLSA sets OT at 1.5 times regular pay • Exception 1 - Hospital EE, overtime for 80+ hours in 14 days or over 8 hours in a day • Exception 2 - Retail workers earning commission (special rules) • Exception 3 - EE in public safety or emergency response can accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT • Exception 4 - EE whose work doesn’t include activities from exception 3, can accumulate 160 hours x 1.5 = 240 hours compensatory time instead of OT

  10. 0 Exempt vs. Nonexempt “Exempt” means exempt from overtime provisions of FLSA • White-collar workers • Executives • Professional • Administrative • Highly compensated employees • Computer professionals • Outside sales (no salary test for this category) • Test of exemption • Employee must be paid on salary basis • See Figure 2-2 (p. 2-10) in text - certain “primary duty” requirements must be met • Blue collar workers are always entitled to overtime pay Putting someone on salary doesn’t mean he/she is exempt!! To be considered exempt, must be paid at least $455/week

  11. EqualPay Act • Amended the FLSA • Requires men and women performing equal jobs receive equal pay • Applies to white-collar workers and outside salespeople as well as nonexempt workers

  12. 0 Child Labor Restrictions • Minimum age for most jobs is 16 • Under age 18 cannot work in hazardous jobs • Employees age 16 and 17 may work unlimited number of hours each week in nonhazardous 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 – can’t discharge an EE whom has filed a wage-hour complaint!

  13. 0 Whatthe FLSA Does Not Cover • Employers are not required to • Pay extra for weekend/holiday work • Pay for holidays or vacation • Limit number of hours of work for persons 16 years of age or over • Give holidays off • Grant vacation time • Grant sick leave

  14. 0 Determining Employee’s Work Time • Prep at work station is principal activity • In some situations changing in/out of protective gear may be part of workday • Idle time • Travel (when part of principal workday) is compensable • On call time is not principal activity if employee can spend time as he/she chooses • Rest periods under 20 minutes are principal activities (can’t make EE “check out”) • Meal periods are not compensable time unless employee must perform some tasks while eating – generally 30 minutes or longer • Work at home is principal activity if nonexempt employee • Sleep time is principal activity if required to be on duty less than 24 hours • Training (when for ER benefit/required) is compensable

  15. NoncompensableActivities • Preliminary and postliminary activities • Portal-to-Portal Act defines these activities • Need not be counted unless customary or contractual • For example checking in/out of plant • Absences due to illness • Tardiness may result in ‘docked’ time, based upon system in place • Must be paid for fractional parts of an hour

  16. 0 Timekeeping • FLSA requires employers to retain time/pay records • Employer in traditional office environment can use • Time sheet • Time cards • Computerized time/attendance records, main kinds include • Card-generated systems (computerized totals) • Badge systems (microchips or bar codes) • Cardless or badgeless system - EE enters identification number • PC-based system • Next generation technology • Touch screen (PC screen reads touch input) • Internet; wireless transmission (cell phones, Personal Digital Assistants) • Biometrics – unique characteristic such as iris scan or whole face

  17. 0 Pay Periods – Methods of Computing Wages/Salaries • 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!

  18. Calculating Overtime Pay There are two methods • Most common method • Calculate gross pay (40 hrs. x employee’s regular rate) • OT rate then calculated by multiplying 1.5 x employee’s regularrate x hours in excess of 40 • Other method • Calculate gross pay (all hours worked x employee’s regular rate) • Then calculate an overtime premium (hours in excess of 40 x overtime premium rate) • Hourly rate x ½ = overtime premium rate These methods result in same total gross pay!

  19. 0 Steps to Follow When Converting Period Wage Rates to Hourly Rates • Annualize salary • Calculate “regular” gross • Calculate hourly pay • Calculate overtime (OT) rate • (1.5 x hourly rate) • Add OT pay to “regular” gross

  20. 0 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 • $346.15 + ($12.98 x 3) = $385.09 gross

  21. 0 Example #2 - Calculating Gross Paycheck 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

  22. 0 Example #3 - 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 + ($12.15 x 4) + ($18.23 x 12) = $1,267.36 gross *Denominator is always number of hours in full time year (may be different between companies)

  23. 0 Example #4 - 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) = $1,000.48 gross

  24. 0 Example #5 - 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 + ($19.04 x 11.5) = $1,234.34 gross

  25. 0 Salaried Employees - Fluctuating Workweek • EE and ER may have an agreement that a fluctuating schedule on a fixed salary is acceptable • Overtime is calculated by dividing normal salary by total hours worked – same rate each week • Then an extra .5 rate is paid for all hours worked over 40 or • Can divide fixed salary by 40 hours – gives different pay rate each week • Then an extra .5 rate is paid for all hours worked over 40 • Alternative – BELO Plan • Appropriate for very irregular work schedule • Deductions cannot be made for non-disciplinary absences • Guaranteed compensation cannot be for more than 60 hours • Calculate salary as: wage rate multiplied by maximum number of hours and then add 50% for overtime

  26. 0 Piece Rate • FLSA requires piecework earners to get paid for nonproductive time • Must equal minimum wage with OT calculated one of two ways • Note: two methods don’t give same results!! 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 or Method B • (Units produced in 40 hours x piece rate) + [(Units produced in OT) x (1.5 x piece rate)]

  27. 0 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

  28. Example#2 - Calculating Piece Rate Gross Pay 0 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

  29. 0 Special Incentive Plans • Special incentive plans are modifications of piece-rate plans • Used 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

  30. 0 Commissions • Commission can be used in many combinations • With base salary or stand alone • As long as minimum wage provisions are met • Exception are outside salespeople who are exempt from FLSA 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 = $1,153.85 base earnings • ($40,000 - $31,500) x .02 = $170 commission • $1,153.85 + $170.00 = $1323.85 gross

  31. Bonusesand Overtime • Bonuses that are part of employees’ wage rates must be included for period covered by bonus • Those known in advance or set up as incentives must be added to wages for week • Then divided by total hours work to get regular pay • OT calculated based upon this rate

  32. 0 Profit-Sharing Plans • Profit Sharing Plans • EE shares in corporate profits – receives his/her share in the form of • Cash payment • Profits paid into retirement or savings account • Profits distributed as stock • These payments must meet standards established by Department of Labor

  33. Violations & Remedies • Wage and Hour Division oversees employees’ complaints of minimum wage or OT violations • Statute of limitation is two years • However, if violation was willful • Statute is three years • “Liquidated damages” can be assessed equal to back pay and OT awards

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