Bernard J. Bieg and Judith A.

Toland

CHAPTER 2

PAYROLL
ACCOUNTING 2016

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COMPUTING WAGES &

SALARIES
Chapter 2

CHAPTER 2

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Learning Objectives
1.
2.
3.

4.
5.

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

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Fair Labor Standards Act

Enterprise

coverage includes all

employees 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
LO-1

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Fair Labor Standards Act

(cont.)
Individual

employee coverage

Employee 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
Federal

Wage & Hour Law provides for

both these types of coverage.
Note: Many family businesses are
exempt!
LO-1
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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,
LO-1
financial control or relationship
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Employee & Employer

Defined (cont.)
Specific

rules apply to employees

of corporations, domestic
employees, partners in
partnerships and statutory
employees
Independent contractor defined
by ABC test
LO-1
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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 8 hours/week or more or
Earn at least $1,900 in a calendar year

Live-in

domestics need not be paid overtime

Direct care workers subject to minimum
wage and OT rules unless hired by family or
individual for fellowship or protection
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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
employees regular rate of pay LO-1

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What is Minimum Wage?

(cont.)
Other

types of compensation not

included in regular rate of pay
include
Gifts made as a reward for service
Payments for a bona fide profitsharing plan
Vacation, holiday, sick day or jury
duty pay
Vehicle, tool or uniform allowances
LO-1

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Minimum Wage vs. Living

Wage
Current

minimum wage is
$7.25/hour
Certain exceptions to minimum
wages
Training wage $4.25/hour for first
consecutive 90 days of employment
if <20 years old
Institutes of higher education, retail
or service establishments and farms
may pay full-time students 85% of LO-1
minimum wage ($6.17/hour)

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Minimum Wage vs. Living

Wage (cont.)
Living

wage refers to local

ordinances that vary between
cities
Law that attempts to keep low-wage
workers wages on track with cost of
living
100+ cities have local laws requiring
employers that do business with the
government to pay a calculated
living wage
LO-1
Some states now include private

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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
Note: In 2015, minimum wage for tipped employees
of federal contractors was set at $4.90 and scheduled
to increase by 95 cents an hour until it equals 70
percent of standard minimum wage.
LO-1
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Tipped Employees (cont.)

Examples of tips received for 40hour 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
LO-1
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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
LO-1
FLSA, state law is followed)

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Overtime Provisions &

Exceptions (cont.)
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
LO-1
education

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Compensatory Time Off

In specific situations, employers may
grant employees compensatory time
(called comp time) off in lieu of
overtime
Employee in public safety or emergency
response can accumulate 320 hours x 1.5
= 480 hours comp time
Employee whose work doesnt 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

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Exempt vs. Nonexempt

Employees
Exempt

means exempt from

some, or all, of FLSA provisions
White-collar workers as outlined in
Figure 2.2 are exempt
Executives, administrators,
professionals
Business owners, highly
compensated employees
Computer professionals and creative
professionals
LO-1
Outside salespeople

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Figure 2.2
Indications of Exempt
Status

LO-1
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Exempt vs. Nonexempt

Employees (cont.)
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

entitled to overtime pay
includes police officers, EMTs,
LO-1
firefighters, paramedics and LPNs

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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 - very specific conditions as
to hours/employment conditions
LO-1
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Child Labor Restrictions

(cont.)
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 serious fines
LO-1
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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
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Determining Employees
Work Time
Principal

activities require
exertion, and are required by the
employer and for the employers
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
LO-2
Idle time and wait time (waiting to

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Determining Employees
Work Time (cont.)
Rest periods 20 minutes or less are principal
activities (cant 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 doctors appointment on site
LO-2
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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 different courts issued diverse
rulings on smallest increments of time

LO-2

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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

LO-3
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Records Used for

Timekeeping (cont.)
Badge systems employ badges in
conjunction with electronic time clocks
Cardless and badgeless systems 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)
LO-3
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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
LO-4
period

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Calculating Overtime Pay

There

are two methods

Most common method
Calculate gross pay (40 hours x
employees regular rate)
OT rate then calculated by
multiplying 1.5 x employees regular
rate x hours in excess of 40

LO-4
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Calculating Overtime Pay

(cont.)
Other

method

Calculate gross pay (all hours worked

x employees regular rate)
Then calculate an overtime premium
(hours in excess of 40 x *overtime
premium rate)
*

Hourly rate x = overtime premium rate

These methods result in same total gross

LO-4
pay!
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Calculating Overtime
Different Rates for
Different
Jobs

Employer may calculate overtime

in one of three ways:
Pay overtime at higher rate
Calculate total earnings for all jobs,
divide by total hours and apply
overtime premium based on that
weighted average
Use overtime rate for job performed
after 40th hour
LO-4

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Steps: Converting Period

Wage Rates to Hourly
Rates

Used to calculate pay for salaried

and
nonexempt employees
1. Annualize salary
2. Calculate regular weekly gross
3. Calculate hourly pay
4. Calculate overtime (OT) rate (1.5 x hourly rate)
LO-4
5. Add OT pay to regular gross

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distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Example #1
Calculating Gross
Paycheck
FACTS: Salary quoted to nonexempt
employee 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) =
LO-4
$385.09 gross
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Example #2
Calculating Gross
Paycheck
FACTS: Salary quoted to nonexempt
employee 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 weekly
rate
$461.54/40 = $11.54 regular
hourly rate

LO-4

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Example #3
Calculating Gross
Paycheck
FACTS: Salary quoted to nonexempt employee 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 hourly rate
$12.15 x 1.5 = $18.23 OT rate
$1,000 + ($12.15 x 4) + ($18.23 x 12) =
$1,267.36 gross

LO-4

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Example #4
Calculating Gross
Paycheck
FACTS: Salary quoted to nonexempt employee 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

LO-4

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Example #5
Calculating Gross
Paycheck
FACTS: Salary quoted nonexempt employee 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 hourly rate
$12.69 x 1.5 = $19.04 OT rate
$1,015.38 + ($19.04 x 11.5) = $1,234.34
gross
LO-4
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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 0.5 overtime premium
is paid for all hours worked over 40
LO-5
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Salaried Nonexempt
Employees - Fluctuating
Workweek (cont.)
or

Can divide fixed salary by 40 hours

gives different pay rate each week
Then an extra 0.5 overtime premium
is paid for all hours worked over 40

LO-5
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Salaried Nonexempt
Employees - Fluctuating
Workweek
(cont.)

Alternative BELO Plan

Appropriate for very irregular work

schedule
Deductions cannot be made for nondisciplinary 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
LO-5
overtime

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Piece Rate
FLSA

requires piecework earners

to get paid for nonproductive
time
Must equal minimum wage with
OT calculated one of two ways

LO-5
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Piece Rate (cont.)

Method

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
LO-5
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Piece Rate (cont.)

or
Method B
(Units produced in 40 hours x piece
rate) + [(Units produced in OT) x
(1.5 x piece rate)]

Note: two methods dont give

same results!!
LO-5
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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 pay using both
methods.

LO-5
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Example #1(cont.)
Calculating Piece Rate
Gross
Pay
Method A
4,812

x .12 = $577.44 regular piece rate

earnings
577.44/47.25 hours = $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
LO-5
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Example #2
Calculating Piece Rate
Gross Pay

FACTS: Inspection rate = $.08/unit.

An employee inspected 6,897
units in 43.5 hours. She inspected
423 of these in overtime.
Calculate using both methods.

LO-5
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Example #2
Calculating Piece Rate
Gross
Pay
Method A
(6,897

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 hours) = $573.95
gross
Method B
(6,474 x .08) + [423 x (.08)(1.5)] =
$568.68 gross
LO-5
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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

LO-5
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Special Incentive Plans

(cont.)
Example

of incentive plan:

0.18/unit for units inspected up to

2,000 units/week
0.24/unit for units inspected between
2,001-3,500 units/week
0.36/unit for units inspected over
3,500 units/week

LO-5
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Commissions
Commission

can be used in many

combinations is a stated
percentage of revenue paid for
each transaction
With base salary or stand alone
As long as minimum wage provisions
are met
Exceptions are outside salespeople who
are exempt from FLSA
LO-5

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Commissions (cont.)
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
LO-5

2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Nondiscretionary Bonuses
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 rateLO-5

2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Nondiscretionary Bonuses
(cont.)
FACTS: Jamil earns $13.50/hour and
also earned a safety performance
bonus of $85.00. He worked 44 hours
this week, his gross pay would be:

$13.50 x 44 hours = $594.00 + $85.00 =

$679.00
$679.00/44 hours = $15.43 regular rate
$15.43 x .5 = $7.72 x 4 hours = $30.88
$679.00 + $30.88 = $709.88

LO-5
2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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

LO-5

2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.