CHAPTER 2 COMPUTING & PAYING WAGES AND SALARIES Developed by Lisa Swallow, CPA CMA MS

Fair Labor Standards Act FLSA - provides for 2 types of coverage Enterprise Coverage => 2 employees engage in interstate commerce Business has >=$500,000 annual gross sales Includes all manufacturing companies Includes all personal care companies Hospitals Nursing homes Institutions for mentally ill Schools Public agencies Interstate commerce refers to Trade Transportation Communication Among several states, between a state and outside states Covers employees if they worked on goods moved in or produced for interstate commerce

Fair Labor Standards Act Individual Coverage Employee covered if engaged in interstate activities Includes ‘fringe activities’ Many family businesses are exempt! Many “nonprofits” also exempt Interstate commerce refers to Trade Transportation Communication Among several states, between a state and outside states Covers employees if they worked on goods moved in or produced for interstate commerce

FLSA & Domestic Help Domestic services Services of a household nature Includes nannies, gardeners, chauffeurs, etc. Babysitters employed on regular basis Covered by FLSA minimum & overtime wage if work more than 8 hours/week or earn $1000 in a calendar year “Live-in” help need not be paid overtime Casual babysitters, not covered Companion for elderly or infirmed, not covered

Definitions Employee Common-law relationship Performs services in a covered employment Common-law relationship Employer has right to control both what work is done & how it will be done Substance of the relationship governs the status Independent Contractor test Free of direction & control Paid by the job or contract Has a personal investment (i.e. own tools) Usually has more than one customer Can hire and direct employees

Definitions Wage Salary Compensation paid to employees Payment on hourly, weekly, or piecework basis Salary Payment base on biweekly, semimonthly, monthly, or annual basis

What is Minimum Wage? Includes all rates of pay including, but not limited to: Commissions Bonuses On-call or differential pay FMV of lodging/meals 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

FLSA Law on Tipped Employees A gift or gratuity given in recognition of service performed for him/her This is FLSA, not state law Tipped Employee Receives $30/month in tips regularly Tips may be considered as part of wages Employer may credit up to $3.02 per hour Small Business Job Protection Act Froze minimum tipped wages at $2.13/hour EE still must make $5.15/hour when combining tips/wages 5.85 x 40 = $234 minimum gross $2.13 x 40 = $85.20/week (employer must pay) ($5.85 -2.13) =3.72 per hour in tips 3.72x 40 = $148.80/week (must make in tips)

What must employer pay if tips for 40-hour work week are… #1. Reported tips = $43 Is $85.20 + $43 > $234 No - ($234 - 43 = $191) Employer must pay #2. Reported tips = $1189 Is $85.20 + $1189 > $234 Yes so Employer pays $85.20 #3. Reported tips = $111 Is $85.20 + 111 > $234 No - ($234 - 111 = $123) Employer must pay 40 hours X $5.85/hr = $234.00 40 hours X $2.13/hr = $ 85.20 Tips must be at least $3.72/hr

“Exempt” means exempt from overtime provisions of FLSA 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 Computer professionals Outside sales Test of exemption: Employee must be paid on salary basis Employee must be paid more than$455 per week. Must meet “primary duty” requirements (see Fig. 2-2 in text) To be considered exempt, must be paid on a salary basis and gross at least $455/week

What the FLSA Does Not Cover What the FLSA Does Not Cover Employers are not required to Pay extra for weekend/holiday work Pay for holidays or vacation Limit hours for persons 16 years of age or over Give holidays off Grant vacation time

FLSA & The 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 hrs x 1.5 = 480 hours compensatory time instead of OT Exception 5 - EE of state or interstate governmental agency – can accumulate 160 x 1.5 = 240 hours compensatory time instead of OT

FLSA & The 40 Hour Work Week FLSA & overtime pay > 40 hours in a work week Hours must be worked For pay periods of 2 weeks or more, employer can give employee 1.5 hours off for every overtime hour. Time off must be in same pay period Applies to tipped employees at same rate

Hospital Employees May have agreement for overtime for 80+ hours in 14 days Employees must receive OT pay for > 8 hrs per day OR OT >80 hours in 14 days Whichever is greater

Child Labor Laws FSLA restricts workers under age 18 Non-farm work Under age 16 cannot work In construction, mining, manufacturing Around hazardous materials In hazardous jobs (17 identified on list) 14-15 year olds limited Employment in food service, retail and gasoline services Employment cannot interfere with school, health & well-being Work performed outside of school hours Maximum 3-hour day, 18 hour week while school in session Maximum 8-hour day, 40 hour week when not in session Hours of 7 am to 7 pm only (9pm summers)

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

Compensable vs. Noncompensable Time Travel (when part of principal workday) is compensable Training (when for ER benefit/required) is compensable Rest periods under 20 minutes are 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 Prep at work station (but not clothes changing, shower) is compensable Work at home is compensable if nonexempt employee Sleep time is compensable if required to be on duty less than 24 hours Noncompensable Time : Pay on holidays, vacation, sick, extra on weekends Pay while waiting to check in/out of plant or for paycheck

Records Used for Timekeeping FLSA requirements Hours each employee worked each day Hours each employee worked each workweek Types of records Time sheets Time cards Computerized time / attendance recording systems Card-generated Badge systems Cardless systems using PIN Nontraditional office environment Touch screen technology (PC screen reads touch input) Internet Biometrics - computer reads eye scan, fingerprint or some other unique characteristic to ensure security

How Wages are Paid 1. Check 2. EFT 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 Pay data to bank goes through ACH (Automated Clearing House) Employees receive “stub” or statement showing gross pay and deductions and net amount deposited to account

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

Calculating Amounts assume annual salary of $35,000 Hourly rate: Overtime: 35000/52/40 = 16.8269 = 16.83 X 1.5 = 25.245 If paid Bi-weekly 35000/26 = 1346.15 If paid Semi-monthly 35000/24 = 1458.33 If paid Monthly 35000/12 = 2916.67 If paid Weekly 35000/52 = 673.08

Examples - Calculating Gross Paycheck (#1) FACTS: Salary quoted is $1,500/month - paid weekly - 43 hours in one pay period Annual: 1500 X 12 = 18,000 weekly gross 18000 / 52 = 346.15 regular rate 346.15 / 40 = 8.65 OT rate 8.65 x 1.5 = 12.98 Total gross (12.98 x 3) + 346.15 = 385.09

Practice Calculating Gross Paycheck (#2) FACTS: Salary quoted is $2,000/month - paid semi monthly - 4 hours OT in one pay period Annual 2000 x 12 = 24000 semimonthly gross 24000 / 24 = 1000 regular rate 24000 / 52 / 40 = 11.54 OT rate 11.54 x 1.5 = 17.31 gross 1,000.00 = (17.31 x 4 ) = 1,069.24

Practice Calculating Gross Paycheck (#3) 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 Annual 2000.00 x 12 = 24,000.00 semimonthly gross 24,000 / 24 = 1,000.00 regular rate 24,000 / (38 x 52) = 12.15 OT rate 12.15 X 1.5 = 18.23 gross 1,000.00 + (4 X 12.15) + (12 X 18.23) = 1267.36 *Denominator is always number of hours in full time year - may be different between companies

Practice Calculating Gross Paycheck (#4) 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 annual gross 1,600.00 X 12 = 19,200.00 semimonthly gross 19,200 / 24 = 800.00 regular rate 19,200 / (35 X 52) = 10.55 OT rate 10.55 X 1.5 = 15.83 Gross 800.00 + (10.55 X 10) + (15.83 X 6) = 1000.48

Practice Calculating Gross Paycheck (#5) FACTS: Salary quoted is $2,200/month - paid biweekly - 11.5 hours OT in one pay period Annual 2200.00 X 12 = 26,400.00 biweekly pay period 26400 / 26 = 1,015.38 regular rate 26,400.00 / 2080 = 12.69 OT rate 12.69 X 1.5 = 19.04 gross 1,015.38 + (11.5 X 19.04) = 1,234.34

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 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 Calculating 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 (4812 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 earnings Method 2 (4212 x .12) + (600 x .12 x 1.5) = 613.44 Gross

Practice Calculating Piece Rate (#2) Facts: Inspection rate = $.08/unit. An EE inspected 6897 u. in 43.5 hours. She inspected 423 of these in overtime. Calculate using both methods. Method 1 (6897 units x .08) = 551.76 reg. Piece earnings 551.76 / 43.5 hrs = 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

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: 30,000.00 / 26 = 1153.85 base (8500 x .02) = 170.00 commission 1153.85 + 170.00 = 1323.85 gross

Other Payment Plans Special Incentive Plans Profit Sharing Plans Different rates paid depending on whether worker fails or attains predetermined production standard See example in text 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