AC122.01: Unit 3 Seminar November 23, 2011 School of Business and Management

Agenda Welcome Seminar Rules Chapter 2 Computing Wages and Salaries Questions

Seminar Rules by Greg Rose 1.If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one! 2.When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue. 3.Please do NOT start side conversations. 4.Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good! 5.Don`t worry about typos. Be clear as you can and refrain from smileys and slang – use proper English. Assignments Grading Late Policy Seminar procedures and Polling Questions

Payroll Accounting 2011 Bernard J. Bieg and Judith A. Toland CHAPTER 2 COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS

Fair Labor Standards Act (FLSA) Federal Wage & Hour Law provides 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  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 Many family businesses are exempt!

Employee & Employer Defined  An employer (ER) is an individual who “acts directly/indirectly in the interest of an employer” in relation to an employee  An individual is an employee (EE) 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  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  On-call or differential  Exceptions to minimum wage 

What is Minimum Wage?  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

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

Minimum Wage vs. “Living Wage”  Minimum wage  $7.25/hour after July 23 rd 2009  “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 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  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 *40 hours x $2.13/hour = $85.20

Tipped Employees  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 $ $1,189 > $290  Yes - so ER pays $85.20 wages  #3. Reported tips = $111  Is $ $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 

Overtime Provisions & Exceptions  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

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

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”) 

Determining Employee’s Work Time  Principal activities require exertion, control or employer mandate  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

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

Child Labor Restrictions 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

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)

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

Timekeeping  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)

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

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 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 = $ weekly gross  $346.15/40 = $8.65 regular rate  $8.65 x 1.5 = $12.98 OT rate  $ ($12.98 x 3) = $ 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 = $ 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, 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 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 = $ 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, 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 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 = $ 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, gross

Example #5 Calculating Gross Paycheck FACTS: Salary quoted is $2,200/month - paid biweekly hours OT in one pay period  $ 2,200 x 12 = $26,400 annual  $26,400/26 = $1, each biweekly pay period  $26,400/52 = $ weekly rate  $507.69/40 = $12.69 regular rate  $12.69 x 1.5 = $19.04 OT rate  $1, ($19.04 x 11.5) = $1, gross

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 payor 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 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 = $ regular piece rate earnings  /47.25 = $12.22 hourly rate  $12.22 x.5 = $6.11 OT premium  $ ($6.11 x 7.25 hrs.) = $ gross Method B  (4,212 x.12) + [600 x (.12)(1.5)] = $ gross

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) = $ regular piece rate earnings  $551.76/43.5 hours = $12.68 hourly rate  $12.68 x.5 = $6.34 OT premium  $ ($6.34 x 3.5) = $ gross Method B  (6474 x.08) + [423 x (.08)(1.5)] = $ gross Example #2 Calculating Piece Rate Gross Pay

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 units/week .36/unit for units inspected over 3500 units/week

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

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, base earnings  ($40,000 - $31,500) x.02 = $170 commission  $1, $ = $1, 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

Let’s look at an example: If an employee earns a bonus of $25.00 in a given week, he worked 43 hours in the week and his regular pay is $10 per hour then you would figure the employees weekly wage as follows: 43 hours X $10 per hour = $ $ = $ for the week OT rate: $ / 43 hours = 10.58/hour X.5 = $5.29 OT amount: 3 hours X $5.29 = $15.87 Therefore the wage for the week would be $ = $470.87

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

ENFORCEMENT The Department of Labor may recover back wages for the employees that have been underpaid in violation of the law. Violations may result in civil or criminal action. –Employers may be assessed civil money penalties of up to $1,100 for each willful or repeated violation of the minimum wage or overtime pay provisions of the law and up to $11,000 for each employee who is the subject of a violation of the Act’s child labor provisions.

ENFORCEMENT The Department of Labor may recover back wages for the employees that have been underpaid in violation of the law. Violations may result in civil or criminal action. –In addition, a civil money penalty of up to $50,000 may be assessed for each child labor violation that causes the death or serious injury of any minor employee, and such assessments may be doubled, up to $100,000, when the violations are determined to be willful or repeated. The law also prohibits discriminating against or discharging workers who file a complaint or participate in any proceeding under the Act. Taken from:

Additional Information Certain occupations and establishments are exempt from the minimum wage and/or overtime pay provisions. Some state laws provide greater employee protections; employers must comply with both. The law requires employers to display this poster where employees can readily see it. Employees under 20 years of age may be paid $4.25 per hour during their first 90 consecutive calendar days of employment with an employer. Certain full-time students, student learners, apprentices, and workers with disabilities may be paid less than the minimum wage under special certificates issued by the Department of Labor. Information taken from:

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