Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland CHAPTER 2 COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS CHAPTER 2 CHAPTER 5 CHAPTER 2 1

Fair Labor Standards Act (FLSA) 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, etc.) regardless of annual sales volume OR  Individual employee coverage  EE whose company may not meet enterprise coverage, but in fringe occupation  For example: drive for fleet that transports goods, with annual revenues equal to $225,000 Many family businesses are exempt! 2

Employee & Employer Defined  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 relationship  IRS test based on behavioral control, financial control or relationship between two parties  Specific rules apply to employees of corporations, partners in partnerships and statutory employees 3

FLSA & Domestics  Domestic help includes nannies, gardeners, chauffeurs, etc.  Casual baby sitter and companions for aged/informed not covered  These employees must earn minimum wage and overtime if:  Work more than 8 hours/week or if  Earn at least $1,700 in a calendar year  Live-in domestics need not be paid overtime 4

What is Minimum Wage?  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 (“opportunity wage”)  Retail/service entities and farms employing full time students – 85%  Full time students employed at their own university - 85%  Student learners in vocational training - 75%  Physically or mentally impaired employees with certification 5

Minimum Wage vs. “Living Wage”  Minimum wage  $7.25 after July 23, 2009  “Living wage”  Law that attempts to keep working poor’s wages on track with cost of living  100+ cities have local laws requiring employers that do business with government to pay a calculated living wage  Some states now include private industry 6

Tipped Employees  “Tipped employee” regularly averages $30/month in tips  Minimum tipped wages is $2.13/hour, therefore tip credit = $5.12/hour  EE must make $7.25/hour when combining tips/wages ($7.25 x 40 = $290 minimum weekly gross)  ER must notify affected employee in order to take the tip credit  Examples of tips received for 40-hour work week  #1. Reported tips = $43  Is $85.20* (minimum tipped wage) + $43 > $290  No - so ER must pay additional wages ($290 - $43 = $247)  #2. Reported tips = $1189  Is $ $1,189 > $290  Yes - so ER pays $85.20 wages  #3. Reported tips = $111  Is $ $111 > $290  No - so ER must pay additional wages of ( $ $111 = $ 179 ) *40 hours x $2.13/hour = $

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  FLSA sets OT at 1.5 times regular pay  Exceptions follow:  Hospital EE, overtime for 80+ hours in 14 days or over 8 hours in a day  Retail or service industry employees earning commission (special rules)  EE receiving remedial education – up to 10 hours overtime per week without overtime pay 8

Compensatory Time Off  In specific situations employers may grant employees compensatory time off in lieu of overtime  EE in public safety or emergency response can accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT  EE whose work doesn’t include activities from exception in bullet above can accumulate 160 hours x 1.5 = 240 hours compensatory time instead of OT  EE must be paid out comp time when employment terminated 9

Exempt vs. Nonexempt Employees “Exempt” means exempt from some, or all, of FLSA provisions  White-collar workers  Executives  Administrators  Professionals  Highly compensated employees  Computer professionals  Outside sales  Test of exemption  Employee must be paid on salary basis  See Figure 2-2 (p. 2-10) in text - certain salary and “primary duty” requirements must be met  Blue collar workers are always entitled to overtime pay Note: Putting someone on salary doesn’t mean he/she is exempt!! 10

Child Labor Restrictions  Nonfarm occupations  Employees age 16 and 17 may work unlimited number of hours each week in nonhazardous jobs  14- and 15-year olds are limited to employment in retail and food/gas service  With very specific conditions as to hours and conditions of employment  Agricultural occupations  Under age 12 employment is generally prohibited  Kids age 10 and 11 may work as hand harvest laborers outside school hours only between 6/1 and 10/15  Subject to many strict limitations  ER needs to have Certificate of Age on file Violations of child-labor provisions can result in up to $11,000/offense 11

What the FLSA Does Not Cover  Employers are not required to  Pay extra for weekend/holiday work  Pay for holidays, vacation or severance  Limit number of hours of work for persons 16 years of age or over  Give holidays off  Grant vacation time  Grant sick leave 12

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  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 for nonexempt employees  Sleep time is principal activity if required to be on duty less than 24 hours  Training time is generally compensable 13

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 14

Timekeeping  FLSA requires employers to retain time/pay records  Traditional types of records used to collect payroll data  Time sheets  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)  Web-based time accounting systems (internet, wireless devices such as PDAs)  Biometrics (unique characteristic such as iris scan) 15

Methods of Computing Wages/Salaries Most common pay periods are as follows  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! 16

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! 17

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 18

Example #1 - Calculating Gross Paycheck 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  $346.15/40 = $8.65 regular rate  $8.65 x 1.5 = $12.98 OT rate  $ ($12.98 x 3) = $ gross 19

Example #2 - Calculating Gross Paycheck 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  $24,000/52 = $ regular rate  $461.54/40 = $11.54 regular rate  $11.54 x 1.5 = $17.31 OT rate  $1,000 + ($17.31 x 4) = $1, gross 20

Example #3 - Calculating Gross Paycheck 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  $24,000/52 = $ weekly rate  $461.54/38 = $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 21

Example #4 - Calculating Gross Paycheck 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  $19,000/52 = $ weekly rate  $369.23/35 = $10.55 regular rate  $10.55 x 1.5 = $15.83 OT rate  $800 + ($10.55 x 10) + ($15.83 x 6) = $1, gross 22

Example #5 - Calculating Gross Paycheck 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  $26,400/52 = $ weekly rate  $507.69/40 = $12.69 regular rate  $12.69 x 1.5 = $19.04 OT rate  $1, ($19.04 x 11.5) = $1, gross 23

Salaried Employees - Fluctuating Workweek  EE and ER 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 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 24

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!! 25

Example #1 - Calculating Piece Rate Gross Pay 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 26

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 27

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 2000 units/week .24/unit for units inspected between units/week .36/unit for units inspected over 3500 units/week 28

Commissions  Commission can be used in many combinations  With base salary or stand alone  As long as minimum wage provisions are met  Exceptions 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, $ = $1, gross 29

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 worked to get regular pay  OT calculated based upon this rate 30

Profit-Sharing Plans  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 31