The Fair Labor Standards Act sets several payroll rules that need to be followed when processing payroll for your small business. If you have nonexempt employees, they must be paid at least the minimum wage. The federal minimum wage rate is currently $7.25 per hour, which was set July 24, 2009.
There are also state minimum wage laws that may be higher, lower or equal to the federal requirement. Employees are entitled to the higher of the two wages. Visit the Department of Labor for your state's minimum wage requirements.
There is a lower minimum wage set for teenagers referred to as the "opportunity wage," which applies to those under age 20. The current opportunity wage is $4.25 per hour and can be paid for the first 90 consecutive calendar days. After 90 days the rate needs to be increased to federal minimum of $7.25 per hour.
To determine whether or not an employee was paid the minimum wage, you'll need to calculate payroll using the 40 hour workweek as set by the U.S. Department of Labor. A longer timeframe cannot be used. Any work over 40 hours requires overtime pay of at least 150% of regular pay.
If your business has employees that are typically tipped, the hourly rate can be set lower than the minimum. However, you'll need to keep track of both tips and the hourly rate to ensure they equal the minimum wage requirements.
A workweek is defined as seven consecutive 24-hour periods. Hours worked over 40 require overtime pay. When calculating payroll, you'll need to take into account overtime pay, which the FLSA requires pay of at least 150% of the regular rate.
Note that each state may have its own state overtime requirements that may differ from the FLSA rules. The law that best benefits the employee must be chosen.
- Step 1: Total Pay for Workweek – Exclusions = Regular Pay
- Step 2: Regular Pay/Hours Worked = Regular Rate of Pay
- Step 3: Regular Rate of Pay x 0.5* = Overtime Premium Rate
- Step 4: Overtime Premium Rate x Hours of Overtime = Premium Pay for Overtime
- Step 5: Total Pay for Workweek + Premium Pay for Overtime = Total Weekly Compensation
*Note that in step 3, you can use 0.5 rather than 1.5 because the overtime hours have already been paid at the employee's pay rate in step 1.
When calculating overtime for payroll, there are several items to exclude: reimbursed business expenses, overtime in excess of FLSA requirements, employer-benefit plan contributions, vacation and holiday pay, and sick pay for unworked hours, gifts, discretionary bonuses and stock options. These items should be left out of the overtime calculation.
Let's take a look at an example of calculating overtime.
Joe earns $12 per hour and typically works a 40-hour workweek. Due to a busy schedule, he works 50 hours. During the week he earns a $50 production bonus. Here is how to calculate Joe's total compensation for the week:
- Total Pay for the Workweek ($12/hour x 50 hours) $600 – $50 Exclusions = $550 Regular Pay
- Regular Pay $550/50 Hours Worked = $11.00 Regular Rate of Pay
- Regular Rate of Pay $11.0 x 0.5 (Overtime Premium Rate) = $5.50 Overtime Premium Rate
- Overtime Premium Rate $5.50 x 10 Hours Overtime = $55 Premium Pay for Overtime
- Total Pay for the Workweek $550 + $55 Premium Pay for Overtime = $605 Total Weekly Compensation