Payroll Accounting 2012 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 work week #1. Reported tips = $43  Is $85.20 (40 x $2.13 minimum tipped wage) + $43 > $290  No - so employer must pay additional wages ($290 - $43 = $247) #2. Reported tips = $1,189  Is $ $1,189 > $290  Yes – so employer pays $85.20 wages #3. Reported tips = $111  Is $ $111 > $290  No - so employer must pay additional wages of ( $ $111 = $ 179 ) *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  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 found in text - certain salary and “primary duty” requirements must be met  Employee must be paid on salary basis at least $455/week  Blue collar workers are always entitled to overtime pay Note: Putting someone on salary doesn’t mean he/she is exempt!! LO-1

Determining Employee’s Work Time  Principal activities require exertion, control or employer mandate  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 less than 24 hours  Training sessions  Waiting for doctor’s appointment 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 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

Steps to Follow When Converting Period Wage Rates to Hourly Rates Used to calculate pay for salaried nonexempt employees  Annualize salary  Calculate regular gross  Calculate hourly pay  Calculate overtime (OT) rate - (1.5 x hourly rate)  Add OT pay to regular gross 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