Payroll Accounting 2011 Bernard J. Bieg and Judith A. Toland

2. 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

3. 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 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

4. 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

5. 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

6. 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

7. 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

8. Tipped Employees “Tipped employee” regularly average smore 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 EE 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 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)

9. 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 in14 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

10. 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 (“comp time”) 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

11. 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!!

12. 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 fines

13. 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

14. 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 Training time is generally compensable

15. 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 Time for nursing mothers to breast feed and/or express milk (part of HCERA)

16. 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!

17. 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!

18. 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

19. 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

20. 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

21. 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

22. 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

23. Example #5Calculating 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

24. 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 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

25. 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!!

26. Example #1Calculating 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

27. 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)(1.5)] = $568.68 gross

28. 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

29. 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

30. 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

31. 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