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Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland. CHAPTER 5 CHAPTER 2. CHAPTER 2 . COMPUTING WAGES & SALARIES. Developed by Lisa Swallow, CPA CMA MS. 0. Fair Labor Standards Act (FLSA). Federal Wage & Hour Law provides for two types of coverage

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chapter 5 chapter 2

Payroll Accounting 2010

Bernard J. Bieg and Judith A. Toland

CHAPTER 5 CHAPTER 2

CHAPTER 2

  • COMPUTING WAGES & SALARIES

Developed by Lisa Swallow, CPA CMA MS

fair labor standards act flsa

0

Fair Labor Standards Act (FLSA)

Federal Wage & Hour Lawprovides 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

Manyfamily businesses are exempt!

employee employer defined

0

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
flsa domestics

0

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
what is minimum wage

0

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
minimum wage vs living wage
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
tipped employees

0

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 $85.20 + $1,189 > $290
      • Yes - so ER pays $85.20 wages
    • #3. Reported tips = $111
      • Is $85.20 + $111 > $290
      • No - so ER must pay additional wages of ($290 - $111 = $179)

*40 hours x $2.13/hour = $85.20

overtime provisions exceptions

0

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
compensatory time off
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
exempt vs nonexempt employees

0

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 entitledto overtime pay

Note: Putting someone on salary

doesn’t mean he/she is exempt!!

child labor restrictions

0

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

what the flsa does not cover

0

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
determining employee s work time

0

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
noncompensable activities
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
timekeeping

0

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)
methods of computing wages salaries

0

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!

calculating overtime pay
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 regularrate 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!

steps to follow when converting period wage rates to hourly rates

0

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
example 1 calculating gross paycheck

0

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 = $346.15 weekly gross
  • $346.15/40 = $8.65 regular rate
  • $8.65 x 1.5 = $12.98 OT rate
  • $346.15 + ($12.98 x 3) = $385.09 gross
example 2 calculating gross paycheck

0

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 = $461.54 regular rate
  • $461.54/40 = $11.54 regular rate
  • $11.54 x 1.5 = $17.31 OT rate
  • $1,000 + ($17.31 x 4) = $1,069.24 gross
example 3 calculating gross paycheck

0

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 38-40 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 = $461.54 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) = $1,267.36 gross
example 4 calculating gross paycheck

0

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 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.

  • $1,600 x 12 = $19,200 annual gross
  • $19,200/24 = $800 semimonthly gross
  • $19,000/52 = $369.23 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) = $1,000.48 gross
example 5 calculating gross paycheck

0

Example #5 - Calculating Gross Paycheck

FACTS: Salary quoted is $2,200/month -

paid biweekly - 11.5 hours OT in one pay period

  • $2,200 x 12 = $26,400 annual
  • $26,400/26 = $1,015.38 each biweekly pay period
  • $26,400/52 = $507.69 weekly rate
  • $507.69/40 = $12.69 regular rate
  • $12.69 x 1.5 = $19.04 OT rate
  • $1,015.38 + ($19.04 x 11.5) = $1,234.34 gross
salaried employees fluctuating workweek

0

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
piece rate

0

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!!

example 1 calculating piece rate gross pay

0

Example #1 - Calculating Piece Rate Gross Pay

FACTS: 4,812 units inspected in a 47.25 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) = $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

Method B

  • (4,212 x .12) + [600 x (.12)(1.5)] = $613.44 gross
slide27

Example #2 - Calculating Piece Rate Gross Pay

0

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) = $551.76 regular piece rate earnings
  • $551.76/43.5 hours = $12.68 hourly rate
  • $12.68 x .5 = $6.34 OT premium
  • $551.76 + ($6.34 x 3.5) = $573.95 gross

Method B

  • (6474 x .08) + (423 x .08 X 1.5) = $568.68 gross
special incentive plans

0

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 2001-3500 units/week
    • .36/unit for units inspected over 3500 units/week
commissions

0

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 = $1,153.85 base earnings
      • ($40,000 - $31,500) x .02 = $170 commission
      • $1,153.85 + $170.00 = $1,323.85 gross
bonuses and overtime
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
profit sharing plans

0

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
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