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Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland. CHAPTER 2 . 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

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Payroll Accounting 2013Bernard J. Bieg and Judith A. Toland



Developed by Lisa Swallow, CPA CMA MS

learning objectives
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


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


tipped employees


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 $85.20 + $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


overtime provisions exceptions


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


exempt vs nonexempt employees


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 entitledto overtime pay – includes police officers, EMTs, firefighters, paramedics and LPNs

Note: Putting someone on salary doesn’t mean he/she is exempt!!


determining employee s work time


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


records used for timekeeping
Records Used for Timekeeping
  • 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 badgelesssytems 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


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!


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 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!


salaried nonexempt employees fluctuating workweek


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


    • 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


piece rate


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


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!!


special incentive plans


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