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CHAPTER 2
PAYROLL ACCOUNTING 2014
Bernard J. Bieg and Judith A. Toland
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CHAPTER 2
COMPUTING WAGES &
SALARIES
Chapter 2
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Learning Objectives
1. Explain the major provisions of the Fair
Labor Standards Act
2. Define hours worked
3. Describe the main types of records used
to collect payroll data
4. Calculate regular and overtime pay
5. Identify distinctive compensation plans
© 2014 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.
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
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service or otherwise on a password-protected website for classroom use.
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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 profit-sharing plan
◦ Vacation, holiday, sick day or jury duty pay
◦ Vehicle, tool or uniform allowances
© 2014 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.
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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
© 2014 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.
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Tipped Employees (cont.)
◦ 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
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service or otherwise on a password-protected website for classroom use.
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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 FLSA, state law is followed)
FLSA sets OT pay at 1.5 times regular pay
© 2014 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.
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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 education
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service or otherwise on a password-protected website for classroom use.
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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 (p. 2-10) are exempt
◦ Executives, administrators, professionals
◦ Business owners, highly compensated
employees
◦ Computer professionals and creative
professionals
◦ Outside salespeople © 2014 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.
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Figure 2-2
Indications of Exempt Status
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service or otherwise on a password-protected website for classroom use.
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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, firefighters, paramedics and LPNs
Note: Putting someone on salary doesn’t
mean he/she is exempt!!
© 2014 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.
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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)
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service or otherwise on a password-protected website for classroom use.
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Determining Employee’s Work
Time (cont.) ◦ 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
© 2014 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.
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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
© 2014 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.
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Records Used for Timekeeping
(cont.) Badge systems employ badges in conjunction with
electronic time clocks
Cardless and badgeless sytems 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)
© 2014 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.
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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 period
◦ Employer may have different pay periods for
different groups within same company!
© 2014 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.
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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
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service or otherwise on a password-protected website for classroom use.
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Calculating Overtime Pay (cont.)
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!
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service or otherwise on a password-protected website for classroom use.
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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
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service or otherwise on a password-protected website for classroom use.
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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
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service or otherwise on a password-protected website for classroom use.
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Salaried Nonexempt Employees
- Fluctuating Workweek (cont.)
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
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service or otherwise on a password-protected website for classroom use.
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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
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service or otherwise on a password-protected website for classroom use.
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Piece Rate (cont.)
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
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service or otherwise on a password-protected website for classroom use.
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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 don’t give same
results!!
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service or otherwise on a password-protected website for classroom use.
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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
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service or otherwise on a password-protected website for classroom use.
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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
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service or otherwise on a password-protected website for classroom use.
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