CHAPTER 2CHAPTER 2

COMPUTING & PAYING COMPUTING & PAYING WAGES AND SALARIESWAGES AND SALARIES

Payroll Accounting 2004 Bernard J. Payroll Accounting 2004 Bernard J. BiegBieg

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

Fair Labor Standards ActFair Labor Standards Act

Federal Wage & Hour LawFederal Wage & Hour Law provides for two types of coverage:provides for two types of coverage:

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

OROR Individual CoverageIndividual Coverage

EE whose company may not meet enterprise coverage, but are in a EE whose company may not meet enterprise coverage, but are in a fringe occupation are covered individually (for example packaging corp. fringe occupation are covered individually (for example packaging corp. with annual revenues = $225,000)with annual revenues = $225,000)

Plus many nonprofits (schools, public agencies et al)Plus many nonprofits (schools, public agencies et al)

ManyMany family businesses are exempt!family businesses are exempt!

FLSA & Domestic HelpFLSA & Domestic Help

Domestic help includes nannies, Domestic help includes nannies, gardeners, chauffeurs, etc. gardeners, chauffeurs, etc.

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

““Live-in” help need not be paid overtimeLive-in” help need not be paid overtime

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

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

*Minimum wage is very different from ‘living wage’. Over 75 cities and counties now have local *Minimum wage is very different from ‘living wage’. Over 75 cities and counties now have local ordinances mandating employers who have local government contracts pay a wage to their ordinances mandating employers who have local government contracts pay a wage to their employees at an amount minimally necessary to live on.employees at an amount minimally necessary to live on.

What is Minimum Wage?What is Minimum Wage?

Tipped EmployeesTipped Employees

Anyone averaging $30/month is a “tipped employee” Anyone averaging $30/month is a “tipped employee” Small Business Job Protection Act froze minimum tipped wages at Small Business Job Protection Act froze minimum tipped wages at

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

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

#1. Reported tips = $43#1. Reported tips = $43 Is $85.20* (minimum tipped wages) + $43 > $206 Is $85.20* (minimum tipped wages) + $43 > $206 No - ($206 - 43 = $163) so ER must pay additional wages ($163 - 85.20)No - ($206 - 43 = $163) so ER must pay additional wages ($163 - 85.20)

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

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

*40 hours x $2.13/hour =

$85.20

40 Hour Work Week40 Hour Work Week

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

Seven consecutive 24-hour periodsSeven consecutive 24-hour periods

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

FLSA sets OT at 1.5 times regular payFLSA sets OT at 1.5 times regular pay Exception 1 - Hospital EE, overtime for 80+ hours in 14 daysException 1 - Hospital EE, overtime for 80+ hours in 14 days Exception 2 - EE receiving remedial educationException 2 - EE receiving remedial education Exception 3 – Retail workers earning commission (special rules)Exception 3 – Retail workers earning commission (special rules) Exception 4 - Emergency public safety EE -Exception 4 - Emergency public safety EE - can accumulate 320 hrs can accumulate 320 hrs

x 1.5 = 480 hours compensatory time instead of OTx 1.5 = 480 hours compensatory time instead of OT Exception 5 - EE of state or interstate governmental agency Exception 5 - EE of state or interstate governmental agency – – can can

accumulate 160 x 1.5 = 240 hours compensatory time instead of OTaccumulate 160 x 1.5 = 240 hours compensatory time instead of OT

Exempt vs. NonexemptExempt vs. NonexemptPutting someone on salary doesn’t mean they’re exempt!!Putting someone on salary doesn’t mean they’re exempt!!

““Exempt” means exempt from overtime provisions of FLSAExempt” means exempt from overtime provisions of FLSA

1. Executives1. Executives discretionary and supervisory powersdiscretionary and supervisory powers nonexempt work cannot exceed 20%nonexempt work cannot exceed 20%

2. Professional2. Professional creativity and intellectual workcreativity and intellectual work uses independent judgmentuses independent judgment nonexempt work cannot exceed 20%nonexempt work cannot exceed 20%

3. Administrative3. Administrative discretionary workdiscretionary work directly assists executivedirectly assists executive nonexempt work cannot exceed 20%nonexempt work cannot exceed 20%

4. Outside sales4. Outside sales primary sales work is away from the employer’s place of business and no primary sales work is away from the employer’s place of business and no

more than 20% non-sales workmore than 20% non-sales work

To be considered exempt, must be paid on a salary

basis and gross at least $250/week

Child Labor LawsChild Labor Laws

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

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

service:service: only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer) only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer) 3 hours per day - 18 hours per week – school year3 hours per day - 18 hours per week – school year 8 hours per day - 40 hours per week – summer8 hours per day - 40 hours per week – summer

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

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

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

What the FLSA What the FLSA Does Not CoverDoes Not Cover

No requirement for employers to:No requirement for employers to: Pay extra for weekend/holiday workPay extra for weekend/holiday work Pay for holidays or vacationPay for holidays or vacation Grant vacation timeGrant vacation time Limit hours for persons 16 years of age or Limit hours for persons 16 years of age or

overover

Compensable vs. Compensable vs. Noncompensable TimeNoncompensable Time

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

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

compensablecompensable Meal periods are not considered compensable unless employee Meal periods are not considered compensable unless employee

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

he/she chooseshe/she chooses Work at home is compensable if nonexempt employeeWork at home is compensable if nonexempt employee Sleep time is compensable if required to be on duty less than 24 Sleep time is compensable if required to be on duty less than 24

hourshours

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

Time sheet Time sheet Time cards Time cards Computerized time/attendance recordsComputerized time/attendance records

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

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

ensure securityensure security

Pay PeriodsPay Periods

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

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

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

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

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

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

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

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

FACTS: Salary quoted is $2,000/month - paid FACTS: Salary quoted is $2,000/month - paid

semi monthly - 4 hours OT in one pay periodsemi monthly - 4 hours OT in one pay period

$2,000 x 12 = $24,000 annual$2,000 x 12 = $24,000 annual $24,000/24 = $1,000 semimonthly gross$24,000/24 = $1,000 semimonthly gross $24,000/2080 = $11.54 regular rate$24,000/2080 = $11.54 regular rate $11.54 x 1.5 = $17.31 OT rate$11.54 x 1.5 = $17.31 OT rate ($1,000) + ($17.31 x 4) = $1,069.24 gross ($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 - FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly. paid semimonthly.

OT - regular pay between 38-40 hours/week; 1.5 after 40. OT - regular pay between 38-40 hours/week; 1.5 after 40. Of 16 Of 16 hours of OT in one pay period only 12 over 40 hours of OT in one pay period only 12 over 40

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

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

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

$1,600 x 12 = $19,200 annual gross$1,600 x 12 = $19,200 annual gross $19,200/24 = $800 semimonthly gross$19,200/24 = $800 semimonthly gross $19,200/(35 hours x 52 weeks) = $10.55 regular rate$19,200/(35 hours x 52 weeks) = $10.55 regular rate $10.55 x 1.5 = $15.83 OT rate$10.55 x 1.5 = $15.83 OT rate $800 + ($10.55 x 10) + ($15.83 x 6) = $1000.48 gross$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 - FACTS: Salary quoted is $2,200/month -

paid biweekly - 11.5 hours OT in one pay periodpaid biweekly - 11.5 hours OT in one pay period

$2,200 x 12 = $26,400 annual$2,200 x 12 = $26,400 annual $26,400/26 = $1,015.38 each biweekly pay period$26,400/26 = $1,015.38 each biweekly pay period $26,400/2080 = $12.69 regular rate$26,400/2080 = $12.69 regular rate $12.69 x 1.5 = $19.04 OT rate$12.69 x 1.5 = $19.04 OT rate $1,015.38 + (11.5 x $19.04) = $1,234.34 gross $1,015.38 + (11.5 x $19.04) = $1,234.34 gross

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

Salaried with Fluctuating Salaried with Fluctuating WorkweekWorkweek

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

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

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

over 40over 40

Not allowed in all statesNot allowed in all states

Piece RatePiece Rate

FLSA requires piecework earners to get paid for FLSA requires piecework earners to get paid for nonproductive timenonproductive time

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

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

oror

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

(units produced in OT) x (1.5)(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 FACTS: 4,812 units inspected in a 47.25 hour week (600 of those units produced in extra hours). (600 of those units produced in extra hours). Employee is paid .12/each.Employee is paid .12/each. Calculate using both Calculate using both methods.methods.

Method 1Method 1 (4,812 x .12) = 577.44 regular piece rate earnings(4,812 x .12) = 577.44 regular piece rate earnings 577.44/47.25 = $12.22 hourly rate577.44/47.25 = $12.22 hourly rate $12.22 x .5 = $6.11 OT premium $12.22 x .5 = $6.11 OT premium $577.44 + ($6.11 x 7.25 hrs.) = $621.74 gross $577.44 + ($6.11 x 7.25 hrs.) = $621.74 gross

Method 2Method 2 (4,212 x .12) + (600 x [.12][1.5]) = $613.44 gross (4,212 x .12) + (600 x [.12][1.5]) = $613.44 gross

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

Method 1Method 1 (6897 units x .08) = $551.76 regular piece rate earnings(6897 units x .08) = $551.76 regular piece rate earnings $551.76/43.5 hours = $12.68 hourly rate$551.76/43.5 hours = $12.68 hourly rate $12.68 x .5 = $6.34 OT premium$12.68 x .5 = $6.34 OT premium $551.76 + (6.34 x 3.5) = $573.95 gross$551.76 + (6.34 x 3.5) = $573.95 gross

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

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

Special Incentive PlansSpecial Incentive Plans

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

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

Example:Example: .18/unit for units inspected up to 2000 units/week.18/unit for units inspected up to 2000 units/week .24/unit for units inspected between 2001-3500 units/week.24/unit for units inspected between 2001-3500 units/week .36/unit for units inspected over 3501 units/week.36/unit for units inspected over 3501 units/week

CommissionCommission

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

For example: For example: Sam sold $40,000 of product. His quota is $31,500. Sam sold $40,000 of product. His quota is $31,500.

He gets 2% in excess of quota. His annual base He gets 2% in excess of quota. His annual base salary is $30,000. He gets paid biweekly - calculate salary is $30,000. He gets paid biweekly - calculate gross paycheck:gross paycheck: $30,000/26 = $1153.85 base earnings$30,000/26 = $1153.85 base earnings (8500 x .02) = $170 commission(8500 x .02) = $170 commission $1153.85 + 170.00 = $1323.85 gross$1153.85 + 170.00 = $1323.85 gross

Profit-Sharing PlansProfit-Sharing Plans

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

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

accountaccount Profits distributed as stockProfits distributed as stock

These payments must meet standards These payments must meet standards established by Department of Laborestablished by Department of Labor