Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland CHAPTER 2 COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS

Learning Objectives Explain the major provisions of the Fair Labor Standards Act Define hours worked Describe the main types of records used to collect payroll data Calculate regular and overtime pay Identify distinctive compensation plans

What is Minimum Wage? Includes all rates of pay including, but not limited to Commissions Nondiscretionary bonuses and severance pay On-call or differential pay Discretionary bonus (one which is not agreed upon or promised before hand) is not included in an employee’s regular rate of pay Other types of compensation not included in regular rate of pay include Gifts made as a reward for service Payments for a bona fide profit-sharing plan Vacation, holiday, sick day or jury duty pay Vehicle, tool or uniform allowances LO-1

Tipped Employees “Tipped employee” regularly average more than $30/month in tips Minimum tipped wages is $2.13/hour, therefore tip credit = $5.12/hour – but may be calculated differently based upon state law Employee must make $7.25/hour when combining tips/wages ($7.25 x 40 = $290 minimum weekly gross) Tip credit remains the same for overtime pay calculation purposes Examples of tips received for 40-hour workweek #1. Reported tips = $43 Is $85.20 (40 x $2.13 minimum tipped wage) + $43 > $290 - (No - so employer must pay additional wages of $290 - $43 = $247) #2. Reported tips = $1,189 Is $ $1,189 > $290 - (Yes – so employer pays $85.20 wages) Note: states’ tip credit percentages may differ from federal law *40 hours x $2.13/hour = $85.20 LO-1

Overtime Provisions & Exceptions Workweek established by corporate policy Must be seven consecutive 24-hour periods For example 12:01 a.m. Saturday - 11:59 p.m. Friday Some states require daily overtime (OT) over 8 hours (if state plan is more generous than FLSA, state law is followed) FLSA sets OT pay at 1.5 times regular pay Employer can require employees to work overtime Exceptions to the above are as follows Hospital employee, overtime for 80+ hours in 14 days or over 8 hours in a day (whichever is greatest) Retail or service industry employees earning commission (special rules) Employee receiving remedial education LO-1

Exempt vs. Nonexempt Employees “Exempt” means exempt from some, or all, of FLSA provisions White-collar workers as outlined in Figure 2-2 (p. 2-10) are exempt Executives, administrators, professionals Business owners, highly compensated employees Computer professionals and creative professionals Outside salespeople Test of exemption means employee must meet ‘primary duty’ requirements listed in Figure 2-2 Employee must be paid on salary basis at least $455/week Blue collar workers are always entitled to overtime pay – includes police officers, EMTs, firefighters, paramedics and LPNs Note: Putting someone on salary doesn’t mean he/she is exempt!! LO-1

Determining Employee’s Work Time Principal activities require exertion, and are required by the employer and for the employer’s benefit Prep at work station is principal activity and in some situations changing in/out of protective gear may be part of workday Travel (when part of principal workday) is compensable Idle time and wait time (waiting to provide employer’s service) Rest periods under 20 minutes are principal activities (can’t make employee “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 for nonexempt employees Sleep time is principal activity if required to be on duty < 24 hours Training sessions (with certain caveats) Waiting for doctor’s appointment on site LO-2

Records Used for Timekeeping LO-3 FLSA requires certain time and pay records be kept Time sheets indicate arrival/departure time of employee Computerized time/attendance recording systems Card-generated systems use computerized time cards Badge systems employ badges in conjunction with electronic time clocks Cardless and badgeless sytems require that an employee use their PIN number to process timekeeping PC-based system allows employee to clock in via computer Next generation technology includes touch-screen kiosks, web-based, biometrics and IVR (interactive voice response)

Computing Wages/Salaries Most common pay periods are as follows Biweekly (26) - 80 hours each pay period Semi-monthly (24) - different hours each pay period Monthly (12)- different hours each pay period Weekly (52) - 40 hours each pay period Employer may have different pay periods for different groups within same company! LO-4

Calculating Overtime Pay There are two methods Most common method Calculate gross pay (40 hours x employee’s regular rate) OT rate then calculated by multiplying 1.5 x employee’s regular rate 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! LO-4

Salaried Nonexempt Employees - Fluctuating Workweek Employee and employer may forge an agreement that a fluctuating schedule on a fixed salary is acceptable Overtime is calculated by dividing normal salary by total hours worked Then an extra.5 overtime premium 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 overtime premium 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 LO-5

Piece Rate FLSA requires piecework earners to get paid for nonproductive time Must equal minimum wage with OT calculated one of two ways 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)] Note: two methods don’t give same results!! LO-5

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 of incentive plan.18/unit for units inspected up to 2,000 units/week.24/unit for units inspected between 2,001-3,500 units/week.36/unit for units inspected over 3,500 units/week LO-5