CHAPTER 2CHAPTER 2

COMPUTING & PAYING COMPUTING & PAYING WAGES AND WAGES AND SALARIESSALARIES

Developed by Lisa Swallow, CPA CMA MS

Fair Labor Standards ActFair 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

Individual Coverage EE whose company may not meet enterprise coverage, but are

in fringe occupation are covered individually (for example packaging)

plus many nonprofits

All companies in manufacturing or personal care ARE covered! Many family businesses are exempt!

FLSA & Domestic HelpFLSA & 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 $1000 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 farms employing FT students - 85% Physically or mentally impaired employees with certification

*Minimum wage is very different from ‘living wage’. Over 40 US communities now have local ordinances mandating employers who have local government contracts to pay a living wage to their employees (the amount minimally necessary to live in that community).

What is Minimum Wage?What is Minimum Wage?

Tipped EmployeesTipped Employees Anyone averaging $30/month is a “tipped employee” This is FLSA, not state law Small Business Job Protection Act froze minimum tipped wages at

$2.13/hour, but EE still must make $5.15/hour when combining tips/wages (5.15 x 40 = $206 minimum weekly gross)

ER gets credit for tips received between $2.13 and $5.15 Examples of tips received for 40-hour work week

#1. Reported tips = $43 Is $85.20 (minimum tipped wages) + $43 > $206 No - ($206 - 43 = $163) so ER must pay additional wages ($163 - 85.20) #2. Reported tips = $1189 Is $85.20 + $1189 > $206 Yes so ER pays $85.20 wages #3. Reported tips = $111 Is $85.20 + 111 > $206 No - ($206 - 111 = $95) so ER must pay additional wages ($95 - 85.20)

40 Hour Work Week40 Hour Work Week

Established by corporate policy (for example 12:01 a.m. Saturday - 11:59 p.m. Friday)

FLSA doesn’t require OT for 8+ hour days but for 40+ hour weeks, although some states require daily overtime over 8 hours

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 - State/federal government agencies Exception 4 - Union mandate

Emergency public safety EE - can accumulate 320 hrs x 1.5 = 480 hours compensatory time instead of OT

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

Exempt vs. NonexemptExempt vs. Nonexempt

Putting someone on salary doesn’t mean they’re exempt!!“Exempt” means exempt from overtime provisions of FLSA

1. Executives discretionary and supervisory powers nonexempt work cannot exceed 20%

2. Professional creativity and intellectual work uses independent judgment nonexempt work cannot exceed 20%

3. Administrative discretionary work directly assists executive nonexempt work cannot exceed 20%

4. Outside sales primary sales work is away from the employer’s place of business

Must be paid on salary and gross at least $250/week

Child Labor LawsChild 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 subject to many strict limitations violations can result in up to $10,000/offense ER needs to have certificate of age on file

Compensable vs. Compensable vs. Noncompensable TimeNoncompensable Time

Travel (when part of principal workday) is consdered work time Training (when for ER benefit/required) is compensable Rest periods under 20 minutes are compensable (can’t make EE

‘check out’) Prep at work station (but not clothes changing, shower) is

compensable Meal periods are not considered compensable unless employee

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

he/she chooses FLSA does not require:

Pay on holidays, vacation, sick, extra on weekends

Pay while waiting to check in/out of plant or for paycheck

TimekeepingTimekeeping 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

Employer in nontraditional office environment can use: Touch screen technology (PC screen reads touch input) Internet Wireless transmission (cell phones, PDAs) Biometrics - iris scan, fingerprint or some other unique characteristic

to ensure security

How Wages are PaidHow Wages are Paid

1. Check Many companies keep a separate operating account Write a check from the regular account to a payroll account for net

amount Easier to reconcile when payroll checks are written against one

account

2. EFT Electronic Funds Transfer Data transmitted to bank through ACH (Automated Clearing House) Employees receive “stub” or statement showing gross pay and

deductions and net amount deposited to account

Pay PeriodsPay Periods

Biweekly (26) - same hours each pay period

Semi-monthly (24) - different hours each pay period

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

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

Steps to Follow when Steps to Follow when Calculating Gross PayCalculating Gross Pay

Annualize SalaryCalculate “regular” grossCalculate hourly payCalculate OT rate (1.5 x hourly

rate)Add overtime pay to “regular”

gross

Examples - Calculating Gross Examples - Calculating Gross Paycheck (#1)Paycheck (#1)

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$346.15/40 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 semi monthly - 4 hours OT in one pay period

$2,000 x 12 = $24,000 annual$24,000/24 = $1,000 semimonthly gross$24,000/52 = $461.54 $461.54/40 = $11.54 regular rate$11.54 x 1.5 = $17.31 OT rate ($1,000) + ($17.31 x 4) = $1,069.24 gross

Practice Calculating Practice Calculating Gross Paycheck (#2)Gross Paycheck (#2)

FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly.

OT - regular pay between 38-40 hours/week; 1.5 after 40. 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

Practice Calculating Practice Calculating Gross Paycheck (#3)Gross Paycheck (#3)

FACTS: Salary quoted is $1,600/month for 35 hour work week -paid semimonthly. OT - 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

Practice Calculating Practice Calculating Gross Paycheck (#4)Gross Paycheck (#4)

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

Practice Calculating Practice Calculating Gross Paycheck (#5)Gross Paycheck (#5)

Piece RatePiece Rate

FLSA requires piecework earners to get paid for nonproductive time

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

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

or

Method 2 (units produced in 40 hours x piece rate) +

(units produced in OT) x (1.5)(piece rate)

Practice CalculatingPractice Calculating Piece Rate (#1) Piece Rate (#1)

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

Method 1 (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 2 (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 1 (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 2 (6474 x .08) + (423 x .12) = $568.68 gross

Practice CalculatingPractice Calculating Piece Rate (#2) Piece Rate (#2)

Commission

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

For example: 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 - calculate gross paycheck: $30,000/26 = $1153.85 base earnings (8500 x .02) = $170 commission $1153.85 + 170.00 = $1323.85 gross