CHAPTER 2
COMPUTING WAGES & SALARIES
Fair Labor Standards Act (FLSA)
Federal Wage & Hour Law provides for
two types of coverage

Enterprise coverage includes all EE if
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Two or more work in interstate commerce and
$500,000 or more annual gross sales
Plus many nonprofits (schools, public agencies, etc.)
OR
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Individual employee coverage

EE whose company may not meet enterprise coverage, but are in
a fringe occupation

For example: drive for fleet that transports goods, but annual
revenues = $225,000
Many family businesses are exempt!
Employee & Employer Defined
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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
 IRS 24-factor test:
 Behavioral control
 Financial control
 Relationship between two parties
Statutory nonemployees considered
unemployed

Direct sellers and licensed real estate
agents
FLSA & Domestics

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Domestic help includes nannies,
gardeners, chauffeurs, etc.
These employees must earn
minimum wage and overtime if:
Work more than 8 hours/week or if
 Earn at least $1,000 in a calendar year

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Live in domestics need not be paid
overtime
What is Minimum Wage?

Includes all rates of pay including, but not limited to:
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Commissions
Bonuses and severance pay
On-call or differential
Exceptions to minimum wage –
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Retail or service establishments and farms employing FT
students - 85%
FT students employed at their own university - 85%
Student-learners at Vocational Technical school - 75%
Physically or mentally impaired employees with
certification
Minimum Wage vs. Living Wage

Minimum wage
$6.55 until July 24, 2009 then to
 $7.25 (This text uses $7.25 in all
calculations!)
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Living wage

100+ cities have local laws requiring
Employers that do business with government
to pay a wage a “living wage”

Attempts to keep working poor’s wages on track
with cost of living
Tipped Employees

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“Tipped employee” regularly averages $30/month in tips
Small Business Job Protection Act froze minimum tipped
wages at $2.13/hour,
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EE still must make $5.85/hour when combining tips/wages (7.25
x 40 = $290 minimum weekly gross)
Examples of tips received for 40-hour work week
#1. Reported tips = $43

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Is $85.20* (minimum tipped wage) + $43 > $290
No - ($290 - 43 = $247) so ER must pay additional wages
#2. Reported tips = $1189
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Is $85.20 + $1189 > $290
Yes - so ER pays $85.20 wages
#3. Reported tips = $111
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*40 hours x
$2.13/hour =
$85.20
Is $85.20 + 111 > $290
No - ($290 - 111 = $179) so ER must pay additional wages
Tipped Employee Rules
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Credit card tips must be paid out to the
employee by the next payday
If employee works more than one job,
tip credit can only be applied to job that
qualifies as “tipped”
If a state’s tip credit differs from the
federal tip credit, employer must
calculate and pay their employees the
higher cash wage
Tip credit is the same in overtime hours
($5.12 / hour)
40 Hour Work Week

Established by corporate policy
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For example 12:01 a.m. Saturday - 11:59 p.m. Friday
Seven consecutive 24-hour periods
Some states require daily overtime (OT) over 8 hours
FLSA sets OT at 1.5 times regular pay
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Exception 1 - Hospital EE, overtime for 80+ hours in 14 days or
over 8 hours in a day
Exception 2 - Retail workers earning commission (special rules)
Exception 3 - Emergency public safety EE

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Can accumulate 320 hours x 1.5 = 480 hours compensatory
time instead of OT
Exception 4 - EE of state or interstate governmental agency

Can accumulate 160 hours x 1.5 = 240 hours compensatory
time instead of OT
Exempt vs. Nonexempt
“Exempt” means exempt from overtime provisions of FLSA

White-collar workers
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To be considered
exempt, must be
paid at least
Test of exemption
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Executives
Professional
Administrative
Highly compensated employees
Computer professionals
Outside sales (no salary test for this category)
$455/week
Employee must be paid on salary basis
See Figure 2-2 in text - certain “primary duty” requirements must
be met
Blue collar workers are always entitled to overtime pay
Putting someone on salary
doesn’t mean he/she is exempt!!
Child Labor Restrictions
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Minimum wage for most jobs is 16
Under age 18 cannot work in hazardous jobs
Under 16 years old limited to employment in retail and
food/gas service:
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Only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer)
3 hours per day - 18 hours per week – school year
8 hours per day - 40 hours per week – summer
In agricultural occupations an employee as young as 10 can
work
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Only from 6/1 - 10/15
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Hand harvest laborers outside school hours only
Subject to many strict limitations
ER needs to have Certificate of Age on file
Violations can result in up to $10,000/offense and/or prison time up to 6 months
Equal Pay Act
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Amended the FLSA
Requires men and women performing
equal jobs receive equal pay
Applies to white-collar workers and
outside salespeople as well as
nonexempt workers
Child Labor Restrictions
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Minimum age for most jobs is 16
Under age 18 cannot work in hazardous jobs
Employees age 16 and 17 may work unlimited number of
hours each week in nonhazardous jobs
Under 16 years old limited to employment in retail and
food/gas service:
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Only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer)
3 hours per day - 18 hours per week – school year
8 hours per day - 40 hours per week – summer
In agricultural occupations an employee as young as 10 can
work
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Only from 6/1 - 10/15
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Hand harvest laborers outside school hours only
Subject to many strict limitations
ER needs to have Certificate of Age on file
Violations can result in up to $10,000/offense – can’t discharge an
EE whom has filed a wage-hour complaint!
What the FLSA Does Not Cover
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Employers are not required to
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Pay extra for weekend/holiday work
Pay for holidays or vacation
Limit hours for persons 16 years of age or
over
Give holidays off
Grant vacation time
Grant sick leave
Determining Employee’s Work Time
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Prep at work station (but not clothes changing, shower) is
principal activity
Travel (when part of principal workday) is compensable
On call time is not principal activity if employee can spend
time as he/she chooses
Rest periods under 20 minutes are principal activities
(can’t make EE “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 if nonexempt employee
Sleep time is principal activity if required to be on duty less
than 24 hours
Training (when for ER benefit/required) is compensable
Non-compensable Activities
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Preliminary and postliminary 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
Timekeeping
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FLSA requires employers to retain time/pay records
Employer in traditional office environment can use
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Time sheet
Time cards
Computerized time/attendance records
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Card-generated systems (computerized totals)
Badge systems (microchips or bar codes)
Cardless/badgeless system - EE enters PIN
PC-based system
Next generation technology
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Touch screen (PC screen reads touch input)
Internet; wireless transmission (cell phones, Personal
Digital Assistants)
Biometrics – unique characteristic such as iris scan or
whole face
Pay Periods – Methods of
Computing Wages/Salaries
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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
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Calculate gross pay (40 hours x regular rate)
OT rate then calculated by multiplying 1.5 x
employee’s regular rate
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Other method
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Calculate gross pay including OT hours (total hours
x regular rate)
Then calculate an overtime premium

Hourly rate x ½ = overtime premium
These methods result in same total gross pay!
Steps to Follow When Converting
Period Wage Rates to Hourly Rates
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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
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$1,500 x 12 = $18,000 annual
$18,000/52 = $346.15 weekly gross
$18,000/2,080 hours = $8.65 regular rate
$8.65 x 1.5 = $12.98 OT rate
($12.98 x 3) + $346.15 = $385.09 gross
Example #2 - Calculating Gross Paycheck
FACTS: Salary quoted is $2,000/month –
paid semimonthly - 4 hours OT in one pay
period
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$2,000 x 12 = $24,000 annual
$24,000/24 = $1,000 semimonthly gross
$24,000/2,080 = $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.
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$2,000 x 12 = $24,000 annual
$24,000/24 = $1,000 semimonthly gross
$24,000/ (38 x 52)*= $12.15 regular rate
$12.15 x 1.5 = $18.23 OT rate
$1,000 + (4 x $12.15) + (12 x $18.23) =
$1,267.36 gross
*Denominator is always number of hours in full time year
(may be different between companies)
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.
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$1,600 x 12 = $19,200 annual gross
$19,200/24 = $800 semimonthly gross
$19,200/(35 hours x 52 weeks) = $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
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$2,200 x 12 = $26,400 annual
$26,400/26 = $1,015.38 each biweekly pay
period
$26,400/2,080 = $12.69 regular rate
$12.69 x 1.5 = $19.04 OT rate
$1,015.38 + (11.5 x $19.04) = $1,234.34
gross
Salaried Employees - Fluctuating Workweek

EE and ER may have an agreement that a fluctuating
schedule on a fixed salary is acceptable
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Overtime is calculated by dividing normal salary by total hours
worked – same rate each week
Then an extra .5 rate is paid for all hours worked over 40
or
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Can divide fixed salary by 40 hours – gives different pay rate each
week
Then an extra .5 rate is paid for all hours worked over 40
Alternative – BELO Plan
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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
Piece Rate
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FLSA requires piecework earners to get paid for
nonproductive time
Must equal minimum wage with OT calculated one of
two ways
Method A
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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)(Piece rate)
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
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(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
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(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 EE inspected 6,897
units in 43.5 hours. She inspected 423 of these in
overtime. Calculate using both methods.
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) = $573.95 gross
Method B
 (6,474 x .08) + [423 x (.08 x 1.5)] = $568.68 gross
Special Incentive Plans
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Some piece rates systems may be
modified to entice workers to produce
more
Computation of payroll is based on
differing rates for differing quantities of
production
Example:
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.18/unit for units inspected up to 2,000
units/week
.24/unit for units inspected between
2,001-3,500 units/week
.36/unit for units inspected over 3,500
units/week
Commissions

Commission can be used in many combinations
(with base salary or stand alone) - as long as
minimum wage provisions are met

Exception 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
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$30,000/26 = $1,153.85 base earnings
(8,500 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 and divided by total hours work
to get regular pay
 OT calculated based upon this rate

Profit-Sharing Plans
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Profit Sharing Plans

EE shares in corporate profits – receives his/her
share in the form of
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Cash payment
Profits paid into retirement or savings account
Profits distributed as stock
These payments must meet standards
established by Department of Labor
Violations & Remedies


Wage and Hour Division oversees
employees’ complaints of minimum
wage or OT violations
Statute of limitation is two years
Unless violation willful – then statute is
three years
 If it was willful, “liquidated damages”
can be assessed equal to back pay and
OT awards
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