Piece Rate Pay OverviewA piece rate pay plan can be used by a business that wants to pay its employees based on the number of units of production that they complete. Using this type of pay plan converts compensation into a cost that directly varies with sales, assuming that all produced goods are immediately sold. If goods are instead stored in inventory for a time and then sold at a later date, there is not such a perfect linkage in the financial statements between sales generated and piece rate labor costs incurred. Show
Use the following method to calculate wages under the piece rate method: Rate paid per unit of production × Number of units completed in the pay period If a company uses the piece rate method, it must still pay its employees for overtime hours worked. There are two methods available for calculating the amount of this overtime, which are:
In addition, an employer using the piece rate pay system must still ensure that its employees are at least paid the minimum wage. Thus, if the piece rate pay is less than the minimum wage, the amount paid must be increased to match the minimum wage. Example of Piece Rate PayOctober Systems manufactures customized cellular phones, and pays its staff a piece rate of $1.50 for each phone completed. Employee Seth Jones completes 500 phones in a standard 40-hour work week, for which he is paid $750 (500 phones × $1.50 piece rate). Mr. Jones works an additional 10 hours, and produces another 100 phones during that time. To determine his pay for this extra time period, October Systems first calculates his pay during the normal work week. This is $18.75 (calculated as $750 total regular pay, divided by 40 hours). This means that the overtime premium is 0.5 × $18.75, or $9.375 per hour. Consequently, the overtime portion of Mr. Jones’ pay for the extra 10 hours worked is $93.75 (calculated as 10 hours × $9.375 overtime premium). If October Systems had instead set the piece rate 50% higher for production work performed during the overtime period, this would have resulted in the overtime portion of his pay being $75 (calculated as $0.75 per unit × 100 phones produced). The difference in the payout between the two overtime calculation methods was caused by the lower productivity level of Mr. Jones during the overtime period. He assembled 25 fewer phones during the overtime period than his average amount during the normal work week, and so would have earned $18.75 less ($0.75 overtime premium × 25 phones) under the second calculation method. How you manage the structures used to pay your employees is an important decision in running your business. Structuring your pay period in a well-thought-out-way can help you maintain compliance with tax and labor laws and consistently meet payroll obligations. What Is a Pay Period?A pay period is a time frame used to calculate earned wages and determine when employees receive their paychecks. Pay periods are fixed and most often recurring on a weekly, bi-weekly, semi-monthly or monthly basis. It’s important to remember that the pay period is different from a workweek. The workweek is a federally-mandated, fixed period of 168 hours – or seven consecutive 24-hour periods – the employer must adopt to maintain compliance with the Fair Labor Standards Act (FLSA). A workweek can begin on any calendar day and at any time of that day, and the FLSA allows businesses to establish different workweeks for different employees or groups of employees. The main purpose of a workweek is to ensure overtime is paid fairly and correctly regardless of the type of pay period.
Pay Period TypesSetting a pay period establishes order and keeps the business on track when it comes to tax withholdings for the IRS, calculating overtime for non-exempt employees and maintaining compliance with regulatory mandates. Within the confines of certain state laws, a business can pick a pay period of its choosing, including implementing multiple pay periods for different groups or types of employees (i.e., salary or hourly wage). Once in place, those pay periods must remain fixed for the calendar year.
There are some circumstances that may need to be accommodated outside of the pay periods tracked and identified by the Wage and Labor Division of the Department of Labor. These include but are not limited to the following. Pay Period ExamplesLet’s take a look at how an exempt, salaried employee making $62,400 a year would receive her paychecks over the course of the year. Watch how the amount in each check will differ according to the structure chosen. It’s important to note that this calculation does not account for employment tax or benefit withholdings.
Now, let’s look at how two popular pay periods would play out with a non-exempt employee paid an hourly wage. If she works more than 40 hours in a given workweek, she’ll need to be paid overtime. Let’s say the workweek starts on a Sunday, and to further simplify, the month in this example begins on a Sunday. The employee worked 42 hours from the 1st through the 7th and 38 hours from the 8th through the 14th. Overtime for each workweek must be calculated separately – meaning that even if the organization adopts a bi-weekly pay period, it cannot average those hours together to get 40 each week. At her wage of $31/hour, the overtime rate (time and a half $31/hour) is $46.50. Calculating 40 hours at $31/hour and two hours at $46.50/hour, the employee earns $1,333 during week one. She works no overtime during week two and earns $31/hour for 38 hours for a total of $1,178. If the employee is paid on a bi-weekly pay period, simply add the amounts from the weekly pay periods together to get the bi-weekly pay period amount of $2,511. Note, this does not account for tax withholdings or benefits. How Pay Periods Are DeterminedAn organization selects the pay period structure that best fits the type of work it does, the needs of its employees, the labor laws where the company does business and other factors. It’s also important to note that the business can choose different pay periods for different types of employees. It’s not uncommon for an enterprise to pay its hourly employees weekly or bi-weekly and its salaried employees semi-monthly or even monthly. But the pay period must be applied consistently during the calendar year to wages earned to stay compliant. Organizations that must remain FLSA-compliant have at least two employees and an annual dollar volume of sales or business done of at least $500,000, along with hospitals, businesses providing medical or nursing care for residents, schools and preschools and government agencies. Even when there is no enterprise coverage, employees are protected by the FLSA if their work regularly involves interstate commerce. Choosing the Best Pay Period for BusinessesWith 42% of private companies selecting bi-weekly, that is the most common pay-period duration in the U.S. Certain industries also tend to favor certain pay periods – for instance, in construction, weekly pay periods are the dominant type of pay period, while financial and information technology industries are more likely to implement semi-monthly pay periods. Data from the U.S. Bureau of Labor Statistics shows that the smallest establishments tend to exhibit the most variety in paying their workers. In considering what pay period to enact for your business, compliance and cash flow figure in heavily. Selecting a pay period (or periods) first requires taking into account the types of employees working at your company — exempt (salaried) and non-exempt (hourly) — and any unique state laws governing how they can be legally paid. Remember, in some states, it is illegal to pay hourly workers on a monthly or even semi-monthly basis. A company also needs to pay close attention to its cash flow cycles in order to best determine how it can efficiently meet payroll. New and smaller companies may have difficulty meeting payroll obligations because of cash flow concerns if they need to process it several times a month. 7 Things to Consider When Choosing Pay PeriodsWith that all in mind, select the right pay period for your business by considering factors such as state regulations, the cost of running payroll and other factors, including the following.
Common Pay Period Mistakes to AvoidMistakes with payroll can result in fines and deeply unsatisfied workers. In fiscal year (FY) 2019, the U.S. Department of Labor recovered $322 million in back wages owed to workers. And an average $1,120 was due per employee in back wages in FY 2020. Some common payroll mistakes include the following.
Manage Pay Periods and Payroll with Payroll SoftwareManaging payroll is exceedingly complex and is absolutely crucial to get correct. It’s not something that should ever be left to spreadsheets. With payroll software, you can configure pay periods and account for different periods for various classes of employees. It automates the calculation of earnings, deductions, company contributions, taxes and paid time off. It can also process payment via direct deposit – ensuring employees get paid sooner and more securely than by paper check. Cloud-based payroll software is regularly updated so you can be confident you’re following the most current tax and labor laws at federal and state levels. All of this saves time and reduces errors. Many payroll departments are shifting their systems toward cloud-based solutions. In 2014, only 14% of companies processed payroll with cloud-based software — that leapt to 39% by 2018. Human capital management (HCM) is the process your business uses to hire, train and retain your workforce. Benefits of a well-managed HCM strategy include higher employee satisfaction, less turnover and a more efficient business. Managing pay and payroll is an important part of HCM, and many people turn to HCM software that includes payroll processing to help. HCM is one of multiple core business software applications. The most successful HCM software solutions connect with other modules from disparate areas of your business through what’s known as enterprise resource planning (ERP) By storing it all in one digital space, you’re better able to manage your data, reporting and understand how one area of the business interacts and affects another. Another benefit of payroll software is it can help you keep track of metrics that show the performance of your team, like the number of payroll errors and the cycle time to process payroll, so you can set goals and improve processes. These key performance indicators (KPIs) are displayed in simple-to-understand dashboards that can be made available to your team and other key stakeholders in the business. Selecting the pay period or pay periods for your business may seem like a simple decision, but it has a significant impact on your company and employees. The decision sets your business up to fulfill one of its most important obligations – paying the people it relies on. Managing different pay periods, accounting for complex pay structures and staying compliant with state and federal laws makes processing payroll complex. HCM software can help you more efficiently manage the process, as well as integrate with other areas of your business and provide vital KPIs to track the performance of your team and help employees manage HR-related documentation, such as taxes and personal contact details. Pay Period FAQsHow does a bi-weekly pay period work?With a bi-weekly pay period, employees will receive their paycheck every other week on the same day of the week — often a Friday. Bi-weekly pay periods mean there are 26 pay cycles a year – and two months will have three pay periods. Bi-weekly is the most common length of pay period identified by the U.S. Bureau of Labor Statistics, with 42% of U.S. private establishments opting to pay their employees every two weeks. What are the four most common pay periods?The four most common pay periods are: weekly, bi-weekly (every two weeks), semi-monthly (twice a month on a set date) and monthly (once a month). How many weeks is a pay period?The number of weeks in a pay period depends on the pay cycle adopted by the employer. In a weekly pay cycle, there are seven days. In a bi-weekly pay period, employees get paid every two weeks. In a semi-monthly pay cycle, employees receive payment roughly every 15 days, unless the payday falls on a weekend, in which case payroll is typically processed the day before. In a monthly pay period, the employees are paid once a month – usually on the last day of the month. How many pay periods are in 2021?The number of pay periods always stays the same with monthly and bi-monthly. But the number of times payroll is processed with a weekly or bi-weekly pay period structure can change depending on the year – including if it begins on a Friday (like 2021) or includes an extra day (leap year). There are 53 Fridays in 2021 – meaning that if the organization adopted a weekly or bi-weekly pay period and paid employees on Jan. 1, there is a possibility that employees receive an “extra” paycheck. If that’s the case, on a bi-weekly pay schedule, the three paycheck months are January, July and December. For organizations that processed their first payroll of the year the following Friday, April and October will be the three paycheck months. When a paycheck is calculated from the number of hours?Employers typically use decimal hours to calculate work week pay. They take the number of hours worked in a week in decimal form, and multiply that by the rate of pay. If you worked 41:15, 41 hours and 15 minutes, how would you calculate your total pay? You need to convert the hh:mm time of 41:15 to decimal hours.
What is the name given to an employee who is hired on something other than a permanent or full time basis?Contingent workers are defined as freelancers, independent contractors, consultants, or other outsourced and non-permanent workers who are hired on a per-project basis.
What is the purpose of a skills inventory quizlet?The skills inventory can be useful to pull employees into a project based on their special skills or used to make the best use of skills within a company in the right key slots.
What is the process by which union leaders and managers negotiate common terms and conditions of employment for the workers represented by unions quizlet?Collective bargaining. the process by which managers and union leaders negotiate acceptable terms and conditions of employment for those workers represented by the unions.
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