COMPUTING WAGES

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CHAPTER 2
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Payroll Accounting 2009 Bernard J. Bieg and
Judith A. Toland

• COMPUTING WAGES SALARIES

Developed by Lisa Swallow, CPA CMA MS
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Fair Labor Standards Act FLSA
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• Federal Wage Hour Law provides 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
• Many family businesses are exempt!

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Employee Employer Defined
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• 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

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FLSA Domestics
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• 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

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What is Minimum Wage?
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• 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

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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 poors wages on track
  with cost of living

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Tipped Employees
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• 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 gt 290
• No - (290 - 43 247) so ER must pay additional
  wages
• 2. Reported tips 1189
• Is 85.20 1189 gt 290
• Yes - so ER pays 85.20 wages
• 3. Reported tips 111
• Is 85.20 111 gt 290
• No - (290 - 111 179) so ER must pay
  additional wages

40 hours x 2.13/hour 85.20
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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 states 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)

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Overtime Provisions Exceptions
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• Work week established by corporate policy
• For example 1201 a.m. Saturday - 1159 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 doesnt include
  activities from exception 3, can accumulate 160
  hours x 1.5 240 hours compensatory time instead
  of OT

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Exempt vs. Nonexempt
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• 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
• doesnt mean he/she is exempt!!

To be considered exempt, must be paid at least
455/week
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Equal Pay 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

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Child Labor Restrictions
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• 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
  cant discharge an EE whom has filed a wage-hour
  complaint!

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What the FLSA Does Not Cover
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• 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

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Determining Employees Work Time
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• 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 (cant 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

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Noncompensable Activities

• 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

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Timekeeping
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• 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

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Pay Periods Methods of Computing Wages/Salaries
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• 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!

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Calculating Overtime Pay

• There are two methods
• Most common method
• Calculate gross pay (40 hrs. x employees regular
  rate)
• OT rate then calculated by multiplying 1.5 x
  employees regular rate x hours in excess of 40
• Other method
• Calculate gross pay (all hours worked x
  employees 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!

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

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Example 1 - Calculating Gross Paycheck
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• 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

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Example 2 - Calculating Gross Paycheck
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• 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

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Example 3 - Calculating Gross Paycheck
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• 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)

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Example 4 - Calculating Gross Paycheck
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• 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

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Example 5 - Calculating Gross Paycheck
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• 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

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Salaried Employees - Fluctuating Workweek
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• 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 gives different pay rate
  each week
• Then an extra .5 rate is paid for all hours
  worked over 40
• or
• Can divide fixed salary by 40 hours same 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

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Piece Rate
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• FLSA requires piecework earners to get paid for
  nonproductive time
• Must equal minimum wage with OT calculated one of
  two ways
• Note two methods dont 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)

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Example 1 - Calculating Piece Rate Gross Pay
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• 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

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Example 2 - Calculating Piece Rate Gross Pay
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• 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

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Special Incentive Plans
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• 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

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Commissions
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• 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

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Bonuses and 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

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Profit-Sharing Plans
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• 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

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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