COMPUTING WAGES & SALARIES Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS

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!

 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

 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

 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

 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 poor’s wages on track with cost of living

 “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 > $290  No - ($ = $247) so ER must pay additional wages  #2. Reported tips = $1189  Is $ $1189 > $290  Yes - so ER pays $85.20 wages  #3. Reported tips = $111  Is $ $111 > $290  No - ($ = $179) so ER must pay additional wages *40 hours x $2.13/hour = $85.20

 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 state’s 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)

 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  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 c an accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT  Exception 4 - EE whose work doesn’t include activities from exception 3, c an accumulate 160 hours x 1.5 = 240 hours compensatory time instead of OT

“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 doesn’t mean he/she is exempt!! To be considered exempt, must be paid at least $455/week

 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

 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 – can’t discharge an EE whom has filed a wage-hour complaint!

 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

 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 (can’t 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

 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

 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

 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!

There are two methods  Most common method  Calculate gross pay (40 hrs. 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!

 Annualize salary  Calculate “regular” gross  Calculate hourly pay  Calculate overtime (OT) rate  (1.5 x hourly rate)  Add OT pay to “regular” gross

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 = $ weekly gross  $18,000/2,080 hours = $8.65 regular rate  $8.65 x 1.5 = $12.98 OT rate  $ ($12.98 x 3) = $ gross

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, gross

FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly. Two rates in addition to semimonthly gross [regular pay between 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, gross *Denominator is always number of hours in full time year (may be different between companies)

FACTS: Salary quoted is $1,600/month for 35 hour work week - paid semimonthly. OT is calculated as regular hourly pay between 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, gross

FACTS: Salary quoted is $2,200/month - paid biweekly hours OT in one pay period  $2,200 x 12 = $26,400 annual  $26,400/26 = $1, each biweekly pay period  $26,400/2080 = $12.69 regular rate  $12.69 x 1.5 = $19.04 OT rate  $1, ($19.04 x 11.5) = $1, gross

 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 – same rate each week  Then an extra.5 rate 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 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

 FLSA requires piecework earners to get paid for nonproductive time  Must equal minimum wage with OT calculated one of two ways  Note: two methods don’t 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)]

FACTS: 4,812 units inspected in a 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) = $ regular piece rate earnings  /47.25 = $12.22 hourly rate  $12.22 x.5 = $6.11 OT premium  $ ($6.11 x 7.25 hrs.) = $ gross Method B  (4,212 x.12) + [600 x (.12)(1.5)] = $ gross

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) = $ regular piece rate earnings  $551.76/43.5 hours = $12.68 hourly rate  $12.68 x.5 = $6.34 OT premium  $ ($6.34 x 3.5) = $ gross Method B  (6474 x.08) + (423 x.08 X 1.5) = $ gross Example#2 - Calculating Piece Rate Gross Pay Example #2 - Calculating Piece Rate Gross Pay

 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 units/week .36/unit for units inspected over 3500 units/week

 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, base earnings  ($40,000 - $31,500) x.02 = $170 commission  $1, $ = $ gross

 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

 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

 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