Chapter 2
Computing Salaries and Wages
Payroll Accounting 2011
Bernard J. Bieg and Judith A. Toland
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
WA L&I - Coverage and Exemptions, Reporting and
Record Keeping
Fair Labor Standards Act (FLSA)
Federal Wage & Hour Law provides for
two types of coverage. Note: Many family businesses are exempt!
Enterprise coverage includes all employee 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
Employee whose company may not meet enterprise coverage, but in fringe
occupation
Coverage depends on the activities, not on the work of fellow employees
For example: drive for fleet that transports goods, with annual revenues equal
to $225,000
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 – employer controls both work done
and how it will be done
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
Domestic help includes nannies, gardeners,
chauffeurs, etc.
Casual baby sitter and companions for aged/infirmed
not covered
These employees must earn minimum wage and
overtime if they
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?
Includes all rates of pay including, but not limited to
Commissions
Bonuses and severance pay (nondiscretionary)
On-call or differential
Not included in the rate of pay
Discretionary bonus, gifts, payment when no work performed
Exceptions to minimum wage
Training wage for first 90 calendar days of employment for newly hired
Employee 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
Washington Minimum Wage
Effective January 1, 2011, Washington’s minimum wage is
$8.67
Teens age 14 and 15 years old may be paid $7.37, 85% of
adult minimum wage.
Minimum Wage vs. “Living Wage”
Minimum wage is $7.25/hour
“Living wage” refers to local ordinances that vary
between cities
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
“Tipped employee” regularly averages 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
Employer must notify the employee of the minimum wage and 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)
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 employee, overtime for 80+ hours in14 days or over 8
hours in a day
Retail or service industry employees earning commission
(special rules)
Employee receiving remedial education – up to 10 hours
overtime per week without overtime pay
Compensatory Time Off
In specific situations, employers may grant
employees compensatory time off in lieu of
overtime
Employee in public safety or emergency response can
accumulate 320 hours x 1.5 = 480 hours compensatory time
(“comp time”)
Employee 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
Employee must be paid out comp time when
employment terminated
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!!
Salary Basis
White-collar employees must be paid their full salary
in any week without regard to the number of hours
worked.
A proportionate share of an exempt employee’s salary
for the time actually worked is allowed only for the
first or last week of employment
Partial-day absences cannot be deducted however
employer can require the employee to use any
accumulated leave time to offset the time absent.
Equal Pay Act
Requires the men and women performing equal work
must receive equal pay.
Violation of the Equal Pay Act – Employer must raise
the lower rate to equal the higher rate.
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
Cannot interfere with their schooling, health, and well-being
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
Employer needs to have Certificate of Age on file
Violations of child-labor provisions can result in up to $11,000/offense fines
Penalties
The government may bring civil and criminal actions against employers
violating the FLSA.
Unintentional with a filed Form 1099 (showing nonemployee
compensation) – 1.5% of the wages paid + 20% of SS tax
Unintentional without a filed Form 1099 – above penalties doubled.
Intentional – 100% of worker’s fed. Income tax and SS tax
Employers who willfully violate the wage and hour provision will be
subject to fine or not more than $10,000 or imprisonment for up to six
months, or both.
Violation of child-labor provision - $11,000 for each violation.
If violation results in death or serious injury – max. penalty is $50,000
for each violation
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
End of Chapter problem 2-1 & 2-2A
1) Under FSLA
2) Under WA. Minimum wages
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
Duty over 24 hours may exclude sleeping period not more than 8 hrs. if given at
least five hours of uninterrupted sleep in the facilities.
Training time is generally compensable
Doctor’s appointment at the direction of the employer
Non compensable 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
Time for nursing mothers to breast feed and/or express
milk (part of HCERA)
End of chapter problem
2-7 A
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
Employer can have different pay periods for
different groups within same company!
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!
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
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
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
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
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
$19,200/52 = $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
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
End of Chapter
2-4 A
2-9 A
2-15A
Salaried 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 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 overtime premium is paid for all hours worked over 40
Alternative – BELO Plan – the following condition must be met:
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
Agreement must exist between the employer and employee
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
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
Example #2
Calculating Piece Rate Gross Pay
FACTS: Inspection rate = $.08/unit. An Employee
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)(1.5)] = $568.68 gross
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
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; calculate his total gross pay.
$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 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
Profit-sharing plans are ones in which an employee
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
End of Chapter problem
2-18A
2-19A
2-20A
Wa Labor and Indurstries
Employers of one or more employees must provide
industrial insurance coverage.
It pays for injured worker’s approved medical, hospital
and related recovery services, and partial wage
replacement payment.
To obtain the industrial insurance coverage, you must
open an account by completing the Master Business
License
When the account is open, an account manager will be
assigned to you to answer specific questions and
workers’ compensation rate (premium rate).
Exempt Employment
Domestic servant in private home unless two or more
are employed regularly for 40 hrs. or more
Person who is not a regular employee
Person working only in return for aid or sustenance
Child under 18 working for their parent in Agriculture
Employee who gets workers’ compensation benefits
through the Government plan
Musician or entertainer
Newspaper carrier
Independent Contractors
You may be required to provide industrial cover to
independent contractor who does not have employees
or provide major equipment.
Self Insured Business
Employer could opt out of the industrial insurance
coverage through self-insurance.
To be self insured:
Substantial resources (at least $25 million in assets)
Effective accident prevention program, meet certain
criteria outlined in Washington Administrative Code
(WAC)296-15-021
Assumes all risks and costs
Manage all aspects of their workers’ compensation
claims.
Premium Rates or composite rate
Rates employer will pay per worker-hour/unit for each risk
classification assigned to the business
Accident-fund premium: only employers pay this premium. It pays
non-medical claim.
Medical-aid premium: both employers and employees pay this
premium. It covers the cost of medical and recovery care.
Supplemental-pension assessment: Employers and employees pay
the assessment. It pays for the cost-of-living adjustment. This rate
is same for all risk classification.
A portion of the premium due, equal to ½ of both medical and
supplemental may be paid by employee through payroll
deduction.
Employers can use any amt. up to the amt. shown on the rate
notice. It is illegal to withhold more than authorized.
Employers could elect to pay all the premium for the employee.
Determining reportable worker
hours/unit
Employer must report the actual number of hours/units worked
by the employee.
Do not include sick-leave, vacations, holidays hours even if paid.
Other method may be used to report hours work in the following
category:
Drywall employee, commissioned personnel, salaried personnel,
piece workers, jockeys,
Splitting worker Hours may be done if accurate records are
supported by timecard, time-book entries, document the
division of duties .
If there’s no accurate time record, the worker’s hours must be
reported in the highest rated classification. Estimates or
percentages are not acceptable documents.