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Employers must pay wages in cash or its equivalent, and direct deposit is continually gaining popularity as a convenient method for paying wages. The payment of wages is regulated by federal and state law. There is no federal law that sets out how often or in what form employers must pay wages to employees. State laws regulate how frequently employees must be paid. Many states have laws regarding the payment of wages upon the termination of employment, including accrued vacation, and these rules often differ depending on whether the termination is voluntary or involuntary. If there is a dispute about wages, the employer must pay the employee what it concedes is due. The employee may file a wage claim with the commissioner of Labor to collect any remaining wages he or she believes are owed.
Please see the state Paychecks section.
According to federal Fair Labor Standards Act (FLSA), a workweek is a period of 168 hours during 7 consecutive 24-hour periods. A workweek may begin on any day of the week and at any hour of the day established by the employer. Generally, for purposes of computing minimum wage and overtime, each workweek stands alone, regardless of whether employees are paid on a weekly, biweekly, monthly, or semimonthly basis. Two or more workweeks cannot be averaged.
Virtually all states regulate how frequently employers must pay employees their wages. State laws also specify the length of time that may elapse between the end of the pay period and payday. Employers in some states are required to notify their employees in advance of regularly scheduled paydays. In addition, some state laws specify when to pay employees who are absent on payday and when the regular payday falls on a holiday.
The U.S. Department of Labor (DOL) regulations interpreting the FLSA state that employers must pay their employees in cash or its equivalent (negotiable instrument). Without further guidance, employers should use reasonable judgment when deciding how to pay employees and use the general definition of negotiable instrument.
Direct deposit and payroll cards have become increasingly popular with some employers, financial institutions, and payroll service providers. Employers may not require that their employees receive their wages by electronic transfer to a payroll card account. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving them by some other means. Permissible alternative wage payment methods are governed by state law but may include direct deposit to an account of the employee’s choosing, a paper check, or cash. The protections in Regulation E for consumers who receive wages on a payroll card are similar to, with a few exceptions, protections available to consumers who receive their wages by direct deposit.
Giving paycheck to another individual. Employees who are absent on payday will sometimes ask a friend or relative to pick up their paychecks for them. Although there is no specific legal prohibition against this practice, the law requires the employer to pay the employee. If the relative or friend steals the check, the employer must still pay the employee. Employers that engage in this practice should be sure to get identification and a signed receipt.
Keeping track of employee working hours is not an optional chore. The FLSA and numerous other federal and state laws require employers to keep records of hours worked, wages paid, and other conditions of employment. Beyond the law, it is impossible to run a successful business without keeping track of employee working hours. The FLSA requires that time records show the date and time a worker's workweek starts, the number of hours worked each day, and the total hours worked during the week. For many business reasons, employers need to keep thorough, accurate records of all hours worked, including starting and quitting times for each employee. According to the DOL, employers may use any timekeeping method they choose. For example, they may use a time clock, badge reader, hand scanner, have a timekeeper keep track of employee's work hours, or tell their workers to write their own times on the records. Any timekeeping plan is acceptable as long as it is complete and accurate.
Employees paid either partially or solely on a commission basis must receive at least the minimum wage for weeks in which their earnings would otherwise fall short of the minimum wage because of low commissions. As with piece rate payments, when employers are forced to make up the difference between an employee’s earnings and the minimum wage, they cannot later recover any part of that payment from the employee’s earnings in weeks when his or her commissions exceed the minimum wage.
Employers sometimes assume that sales employees who are paid partially or solely on a commissioned basis are exempt from the recordkeeping, minimum wage, and overtime requirements of the FLSA. This is a fallacy. Certain commissioned employees may be exempt under the retail sales or outside sales exemptions from the FLSA. However, certain criteria must be met for these exemptions to apply, and for the retail sales exemption, time records must be kept, regardless. Many types of commissioned sales positions fall under neither of these exemptions and are subject to the recordkeeping, minimum wage, and overtime provisions of the FLSA.
Commissions and overtime. The FLSA does not require that overtime be paid weekly. The general rule is that overtime pay earned in a particular workweek must be paid on the regular payday for the period in which the workweek ends. If the amount of overtime owed cannot be determined until sometime after the regular pay period, the employer must pay the overtime compensation as soon as is practicable. An example of that would be if an employee later receives commissions that must be included in calculating his or her regular rate of pay.
Commissions must be included in total remuneration, regardless of the basis on which they are calculated and whether they are the sole source of income or paid in addition to a guaranteed salary or hourly rate. The fact that commissions are paid on some other basis than weekly, or that payment is delayed for a time past the employer’s normal payday, does not excuse the employer from including them in the employee’s regular rate. Note that, as a practical matter, most commissions are calculated based on periods of time (for instance, months and quarters) that are not neatly divided into equal 7-day FLSA workweeks.
Employers may have to retroactively calculate the regular rate and overtime owed for commissions, bonuses, or other forms of compensation that are paid irregularly or cannot be identified with a particular workweek. If an employer does not know the amount of a commission or bonus until the end of the month, quarter, or even year, it may temporarily disregard them in making weekly overtime pay calculations. However, once the payment is made, the employer must retroactively calculate and pay any overtime owed for those weeks. It can be issued as a separate check or included in the employee’s next paycheck or a bonus check.
Commissions must be included in total remuneration, regardless of the basis on which they are calculated or whether they are the employee’s sole source of income or paid in addition to a guaranteed salary or hourly rate.
When an employee’s pay is increased by bonuses, commissions, or other forms of additional compensation, his or her regular and overtime rates of pay are also increased. The following calculations are used:
• Divide the employee’s total earnings for the week—including bonuses, commissions, and so on—by the number of hours worked to determine the regular rate of pay for the week.
• Multiply the regular rate by 1.5 to determine the employee’s overtime rate for the week.
• Multiply the regular rate by 40 nonovertime hours; multiply the overtime rate by the number of overtime hours worked, and then add the two totals to determine total compensation owed for the week, including overtime; or
• Multiply the regular rate by the total number of hours worked, including overtime; then multiply one-half the regular rate by the number of overtime hours worked, and add the two totals to determine compensation owed for the week, including overtime. This should be the same result as reached under the method described in the third bullet point, above.
If a monthly bonus is paid at the end of the month but the employee was paid weekly, the employer must apportion the bonus among the workweeks. For each week in which the employee earned some portion of the bonus, the employer must then:
• Recalculate the employee’s regular rate of pay with the commission added in;
• Subtract the original rate of pay from the adjusted rate of pay (to find out how much it was increased by the bonus or commission); and
• Pay the employee one-half the amount of the increase for each overtime hour worked in that week.
If it is impossible to attribute bonuses and commissions to the actual week in which they were earned, some other reasonable and equitable method of allocation must be adopted. For example, it may be reasonable and equitable to assume that the employee earned an equal amount of bonuses or commissions during each week of the pay period. It is generally not acceptable to simply attribute a commission or bonus earned over time to the single workweek in which it is calculated and/or paid.
Example 1. At the end of December, Robert received a $600 longevity payment based on his years of continuous service with the company. The payment was made pursuant to a long-standing policy set forth in the company’s employee handbook. During the year, Robert worked 2,000 regular hours and 500 overtime hours, for a total of 2,500 hours. He was paid his regular hourly rate and an appropriately calculated overtime rate for all those hours. However, when he receives the longevity bonus, he is entitled to receive additional overtime compensation as follows:
• The employer must adjust his regular rate, retroactively, by $.24 per hour ($600÷2,500 hours).
• This means he is entitled to an additional $.12 ($.24 x .5) for each overtime hour worked during the year.
• He is entitled to an additional $60 in overtime pay ($.12 x 500 overtime hours).
• The total payment owed to Robert is $660 (the amount of his longevity pay plus additional overtime owed).
If an employee receives a weekly commission, it is treated the same as a bonus for the purpose of calculating overtime owed for the week. The commission is added to the employee’s hourly earnings for the workweek, and the total is divided by the total number of hours worked to obtain the employee’s regular hourly rate. The employee must then be paid the overtime rate of one and one-half times the regular rate for each overtime hour worked that week.
Example 2. Zack is a nonexempt inside sales employee. He is paid $15 per hour, plus commissions totaling 10 percent of any sale made during a workweek. During a workweek, he works 50 hours and earns $200 in commissions. His compensation is calculated as follows: First, take his total earnings for the week ($750 in hourly pay ($15 x 50) plus the $200 bonus, totaling $950) and divide that figure by the number of hours worked (50) to determine the adjusted regular rate, which is $19. Zack is thus owed $19 per hour for all 50 hours worked, plus an additional $9.50 (one-half of $19) for the 10 overtime hours, or $1,045 in total compensation for the week. This amount incorporates the hourly pay, the commission, and overtime at the correct rate.
Many states also specify when employers must pay employees who leave the company. Often, the statutes distinguish between voluntary and involuntary termination. Under the most common provision, employees who are fired or laid off must be paid just after termination; employees who resign must wait until the next regular payday. However, some state laws provide that employees who give their employers sufficient advance notice of their intention to resign are entitled to receive their pay on their final day of work. Some states require that, in addition to wages, employers pay terminating employees for accrued vacation time.
Please see the state Paychecks section.
In case of wage disputes, employers must pay the wages it concedes are due. Employees may file a wage claim with the commissioner of Labor to collect the rest. States may have their own laws on wage disputes.
Please see the state Paychecks section.
Both federal and state laws regulate payroll recordkeeping. Many states require employers to notify employees of all earnings and deductions for each pay period. The FLSA requires that employers keep certain information on file for each person on the payroll.
Exempt and nonexempt. The following information must be kept for both exempt and nonexempt personnel:
• Employee's full name, number, or identifying symbol (company identification (ID) number or Social Security number)
• Home address, including ZIP code
• Date of birth, if the employee is under the age of 19
• Sex, and occupation in which employed
• Time and day of week on which workweek begins
• Total wages paid each pay period
• Date of payment and the pay period covered by the payment
• Retroactive wage payment under government supervision
Nonexempt only. The following additional information must also be kept for nonexempt personnel only:
• For any week in which overtime pay is due, regular hourly rate of pay, the basis on which wages are paid, and regular rate exclusions
• Hours worked each workday and each workweek
• Total daily or weekly straight time earnings or wages
• Total premium pay for overtime hours
• Total additions to or deductions from wages paid in each pay period
• Factors other than gender that are the basis for payment of any wage differential to employees of differing sexes
Place of records. Employers must keep records safe and accessible at the place or places of employment, or at one or more established central recordkeeping offices where the records are customarily maintained. Where the records are maintained at a central recordkeeping office, other than in the place or places of employment, the records must be made available within 72 hours following notice from an administrator of the DOL or a duly authorized and designated representative.
Inspection of records. All records must be available for inspection and transcription by an administrator of the DOL or a duly authorized and designated representative.
Employers must display an official poster outlining the provisions of the Act, available at no cost from local offices of the Wage and Hour Division and toll-free, by calling (866) 4-US-WAGE (866-487-9243). This poster is also available electronically for downloading and printing at DOL's website at https://www.dol.gov/whd.
There are arguments both for and against the policy of advancing money to an employee. A loan may alleviate an employee's financial stress and the distraction it might cause in the workplace. On the other hand, some companies have decided that good employer/employee relationships are hard enough to maintain without the added complications of a lender/borrower relationship. Employers that do occasionally make advances against wages rarely consider making a loan to nonexecutive employees, except in an emergency, and then only when all conventional loan sources have been exhausted or are unavailable. Such an emergency situation might involve an employee learning of a family illness or death requiring immediate travel arrangements after banking hours. In some cases, employers may provide loans to employees if they do something the employer wishes; e.g., buy homes in neighborhoods or cities in order to revitalize them. Sometimes the employer will forgive these loans. Many companies that want to provide assistance in meeting employees' financial needs consider providing loans through a 401(k) plan or through participation in a credit union.
In order to set clear guidelines, no matter what they are, it is a good idea to adopt a policy that addresses loans to employees. The negative impact of a strict policy (e.g., that there will not be any pay advances under any circumstances) can be softened with an explanation of the reasoning for the rule. Exceptions to the general rule may be adopted. The policy should provide explicitly who has authority to make exceptions. Most employers usually authorize only one or two officers to grant loans. Other factors to address in a loan or advance policy include maximum loan amounts, interest rates, documentation, and payback provisions.
Truth in Lending Act (TILA). An employee loan may be subject to the federal TILA. This is primarily a disclosure statute, the purpose of which is to give the borrower information before receiving the loan. If the employer makes employee loans regularly, the act mandates credit charges be completely and conspicuously disclosed in dollars and cents and as an annual percentage rate. The penalties for violating truth-in-lending laws may be severe.
Tax and legal considerations. Employee loan programs, especially those that might be interest-free (or very low rate) are a popular incentive or fringe benefit for executive-level employees. Some companies allow these types of loans to be used to exercise stock options. Tax and securities laws are complex, so employers should consult a tax expert before making such loans to ensure that their program complies with applicable laws and is structured to benefit both the employer and the employee. For example, because the Internal Revenue Service (IRS) considers interest-free loans a form of compensation, both the employer and the employee may be required to pay additional taxes. Advances are not considered taxable wages if the employees are legally obligated to repay them, whether on demand, upon a specific date, or in installments.
Loan payback provisions. Whatever sort of loan the employer is making, there is the question of how to structure payback. The employer's preferred method of repayment is generally through payroll deduction. However, since there are laws in many states regulating payroll deductions, the employer must structure the payback according to the state's law on the question. The employer and employee may agree to a wage assignment, generally requiring a written assignment, agreed to in writing and signed by the employer. The employee may revoke the terms at any time on written notice to the employer.
Employee assistance program (EAP) assistance. Granting a loan to an employee who is in serious financial trouble may be a mistake for both the employer and the employee. Another loan usually won't solve this kind of problem and may lead to loss of a good employee if the repayment schedule cannot be met. However, providing help through an EAP, consumer credit counseling company, or bank or credit union (possibly providing a good reference for the employee to the bank) may lead to some resolution for the employee.
Advance Earned Income Credit (EIC). EIC is a federal tax credit for working families who meet certain income guidelines. Eligible families either pay less federal income tax or get a larger tax refund. Salary, wages, some disability benefits, and 401(k) contributions by the employer count as earned income under the EIC guidelines. Employers must give employees an advance portion of their earned income credit if the employee requests the advance, the employee qualifies for the credit, and the employee provides the employer with a completed Form W-5 for the tax year. The advance is to be included in the worker's paycheck. The employee, not the employer, is responsible for determining whether he or she is eligible for the credits.
Below-market loans. According to the IRS, a below-market loan is a loan made in connection with performance of work by employee for employer. A loan of more than $10,000 with an interest rate less than the applicable federal interest rate means that the employee has received additional compensation. If the loan is a demand loan (one in which the loan may be called at any time by the employer or where the interest rate rises to at least the market rate if the borrower terminates work), the imputed income is counted only when the outstanding balance exceeds $10,000. For a term loan (a loan for a specified period with a specified rate), if the outstanding balance is over $10,000 at any time, the employee difference between the federal interest rate and the employer-charged rate is considered income until the loan is paid off. There is an exception for an employee relocation loan at below-market rates. The loan will not be considered additional income to the employee if it is secured by a mortgage on the new principal residence or is a bridge loan payable within 14 days after settlement on the former home. Employers that make these loans must follow the letter of state (if applicable) and federal law; otherwise, employees may invoke the law to avoid loan repayment. Before making a below-market loan to employees, employers should consult a tax attorney.
Employer-Assisted Housing Loans (EAH). This is an employer-provided benefit, most commonly offered to an employee as a second mortgage on a new house, as a grant, forgivable loan, deferred or repayable loan, or as matched savings. The EAH program involves a partnership between the employer, Fannie Mae (a government program that provides financial services for home buyers), a lender, and the employee. The employer may provide help with a down payment or closing costs, or both, and information about completing the home-buying process. Fannie Mae helps the employer create the plan and identify lenders.
Loans from 401(k) plans. An increasingly popular way for employees to obtain a loan is by borrowing from their own 401(k)-plan account. Plans may be designed or amended to provide loans to participants. Allowing loans encourages lower-paid employees to participate in a 401(k) plan by giving employees tax-free access to the 401(k) accounts. An added incentive for employees is that 401(k)-plan loan repayments of both principle and interest go back to the employee's own account. The Internal Revenue Code (IRC) and the IRS regulations require that those 401(k) loans be available to all participants and beneficiaries on a reasonable equivalent basis; not be available to highly compensated employees in amounts greater than are available to other employees; have a reasonable rate of interest; be adequately secured; be consistent with plan provisions; be repaid over 5 years (up to 30 if the loan is used to purchase a borrower's principal residence); and be limited (assuming no prior loan was outstanding 1 year previously) to the lesser of 50 percent of the vested 401(k) account balance or $50,000. When an employee retires or terminates from the job, any unpaid amount of a 401(k) plan will be subject to federal (and perhaps state) income tax.
For additional information, employers may contact:
U.S. Department of Labor
Frances Perkins Building
200 Constitution Avenue, NW
Washington, DC 20210
866-487-9243
Last reviewed on July 1, 2018.
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National
Employers must pay wages in cash or its equivalent, and direct deposit is continually gaining popularity as a convenient method for paying wages. The payment of wages is regulated by federal and state law. There is no federal law that sets out how often or in what form employers must pay wages to employees. State laws regulate how frequently employees must be paid. Many states have laws regarding the payment of wages upon the termination of employment, including accrued vacation, and these rules often differ depending on whether the termination is voluntary or involuntary. If there is a dispute about wages, the employer must pay the employee what it concedes is due. The employee may file a wage claim with the commissioner of Labor to collect any remaining wages he or she believes are owed.
Please see the state Paychecks section.
According to federal Fair Labor Standards Act (FLSA), a workweek is a period of 168 hours during 7 consecutive 24-hour periods. A workweek may begin on any day of the week and at any hour of the day established by the employer. Generally, for purposes of computing minimum wage and overtime, each workweek stands alone, regardless of whether employees are paid on a weekly, biweekly, monthly, or semimonthly basis. Two or more workweeks cannot be averaged.
Virtually all states regulate how frequently employers must pay employees their wages. State laws also specify the length of time that may elapse between the end of the pay period and payday. Employers in some states are required to notify their employees in advance of regularly scheduled paydays. In addition, some state laws specify when to pay employees who are absent on payday and when the regular payday falls on a holiday.
The U.S. Department of Labor (DOL) regulations interpreting the FLSA state that employers must pay their employees in cash or its equivalent (negotiable instrument). Without further guidance, employers should use reasonable judgment when deciding how to pay employees and use the general definition of negotiable instrument.
Direct deposit and payroll cards have become increasingly popular with some employers, financial institutions, and payroll service providers. Employers may not require that their employees receive their wages by electronic transfer to a payroll card account. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving them by some other means. Permissible alternative wage payment methods are governed by state law but may include direct deposit to an account of the employee’s choosing, a paper check, or cash. The protections in Regulation E for consumers who receive wages on a payroll card are similar to, with a few exceptions, protections available to consumers who receive their wages by direct deposit.
Giving paycheck to another individual. Employees who are absent on payday will sometimes ask a friend or relative to pick up their paychecks for them. Although there is no specific legal prohibition against this practice, the law requires the employer to pay the employee. If the relative or friend steals the check, the employer must still pay the employee. Employers that engage in this practice should be sure to get identification and a signed receipt.
Keeping track of employee working hours is not an optional chore. The FLSA and numerous other federal and state laws require employers to keep records of hours worked, wages paid, and other conditions of employment. Beyond the law, it is impossible to run a successful business without keeping track of employee working hours. The FLSA requires that time records show the date and time a worker's workweek starts, the number of hours worked each day, and the total hours worked during the week. For many business reasons, employers need to keep thorough, accurate records of all hours worked, including starting and quitting times for each employee. According to the DOL, employers may use any timekeeping method they choose. For example, they may use a time clock, badge reader, hand scanner, have a timekeeper keep track of employee's work hours, or tell their workers to write their own times on the records. Any timekeeping plan is acceptable as long as it is complete and accurate.
Employees paid either partially or solely on a commission basis must receive at least the minimum wage for weeks in which their earnings would otherwise fall short of the minimum wage because of low commissions. As with piece rate payments, when employers are forced to make up the difference between an employee’s earnings and the minimum wage, they cannot later recover any part of that payment from the employee’s earnings in weeks when his or her commissions exceed the minimum wage.
Employers sometimes assume that sales employees who are paid partially or solely on a commissioned basis are exempt from the recordkeeping, minimum wage, and overtime requirements of the FLSA. This is a fallacy. Certain commissioned employees may be exempt under the retail sales or outside sales exemptions from the FLSA. However, certain criteria must be met for these exemptions to apply, and for the retail sales exemption, time records must be kept, regardless. Many types of commissioned sales positions fall under neither of these exemptions and are subject to the recordkeeping, minimum wage, and overtime provisions of the FLSA.
Commissions and overtime. The FLSA does not require that overtime be paid weekly. The general rule is that overtime pay earned in a particular workweek must be paid on the regular payday for the period in which the workweek ends. If the amount of overtime owed cannot be determined until sometime after the regular pay period, the employer must pay the overtime compensation as soon as is practicable. An example of that would be if an employee later receives commissions that must be included in calculating his or her regular rate of pay.
Commissions must be included in total remuneration, regardless of the basis on which they are calculated and whether they are the sole source of income or paid in addition to a guaranteed salary or hourly rate. The fact that commissions are paid on some other basis than weekly, or that payment is delayed for a time past the employer’s normal payday, does not excuse the employer from including them in the employee’s regular rate. Note that, as a practical matter, most commissions are calculated based on periods of time (for instance, months and quarters) that are not neatly divided into equal 7-day FLSA workweeks.
Employers may have to retroactively calculate the regular rate and overtime owed for commissions, bonuses, or other forms of compensation that are paid irregularly or cannot be identified with a particular workweek. If an employer does not know the amount of a commission or bonus until the end of the month, quarter, or even year, it may temporarily disregard them in making weekly overtime pay calculations. However, once the payment is made, the employer must retroactively calculate and pay any overtime owed for those weeks. It can be issued as a separate check or included in the employee’s next paycheck or a bonus check.
Commissions must be included in total remuneration, regardless of the basis on which they are calculated or whether they are the employee’s sole source of income or paid in addition to a guaranteed salary or hourly rate.
When an employee’s pay is increased by bonuses, commissions, or other forms of additional compensation, his or her regular and overtime rates of pay are also increased. The following calculations are used:
• Divide the employee’s total earnings for the week—including bonuses, commissions, and so on—by the number of hours worked to determine the regular rate of pay for the week.
• Multiply the regular rate by 1.5 to determine the employee’s overtime rate for the week.
• Multiply the regular rate by 40 nonovertime hours; multiply the overtime rate by the number of overtime hours worked, and then add the two totals to determine total compensation owed for the week, including overtime; or
• Multiply the regular rate by the total number of hours worked, including overtime; then multiply one-half the regular rate by the number of overtime hours worked, and add the two totals to determine compensation owed for the week, including overtime. This should be the same result as reached under the method described in the third bullet point, above.
If a monthly bonus is paid at the end of the month but the employee was paid weekly, the employer must apportion the bonus among the workweeks. For each week in which the employee earned some portion of the bonus, the employer must then:
• Recalculate the employee’s regular rate of pay with the commission added in;
• Subtract the original rate of pay from the adjusted rate of pay (to find out how much it was increased by the bonus or commission); and
• Pay the employee one-half the amount of the increase for each overtime hour worked in that week.
If it is impossible to attribute bonuses and commissions to the actual week in which they were earned, some other reasonable and equitable method of allocation must be adopted. For example, it may be reasonable and equitable to assume that the employee earned an equal amount of bonuses or commissions during each week of the pay period. It is generally not acceptable to simply attribute a commission or bonus earned over time to the single workweek in which it is calculated and/or paid.
Example 1. At the end of December, Robert received a $600 longevity payment based on his years of continuous service with the company. The payment was made pursuant to a long-standing policy set forth in the company’s employee handbook. During the year, Robert worked 2,000 regular hours and 500 overtime hours, for a total of 2,500 hours. He was paid his regular hourly rate and an appropriately calculated overtime rate for all those hours. However, when he receives the longevity bonus, he is entitled to receive additional overtime compensation as follows:
• The employer must adjust his regular rate, retroactively, by $.24 per hour ($600÷2,500 hours).
• This means he is entitled to an additional $.12 ($.24 x .5) for each overtime hour worked during the year.
• He is entitled to an additional $60 in overtime pay ($.12 x 500 overtime hours).
• The total payment owed to Robert is $660 (the amount of his longevity pay plus additional overtime owed).
If an employee receives a weekly commission, it is treated the same as a bonus for the purpose of calculating overtime owed for the week. The commission is added to the employee’s hourly earnings for the workweek, and the total is divided by the total number of hours worked to obtain the employee’s regular hourly rate. The employee must then be paid the overtime rate of one and one-half times the regular rate for each overtime hour worked that week.
Example 2. Zack is a nonexempt inside sales employee. He is paid $15 per hour, plus commissions totaling 10 percent of any sale made during a workweek. During a workweek, he works 50 hours and earns $200 in commissions. His compensation is calculated as follows: First, take his total earnings for the week ($750 in hourly pay ($15 x 50) plus the $200 bonus, totaling $950) and divide that figure by the number of hours worked (50) to determine the adjusted regular rate, which is $19. Zack is thus owed $19 per hour for all 50 hours worked, plus an additional $9.50 (one-half of $19) for the 10 overtime hours, or $1,045 in total compensation for the week. This amount incorporates the hourly pay, the commission, and overtime at the correct rate.
Many states also specify when employers must pay employees who leave the company. Often, the statutes distinguish between voluntary and involuntary termination. Under the most common provision, employees who are fired or laid off must be paid just after termination; employees who resign must wait until the next regular payday. However, some state laws provide that employees who give their employers sufficient advance notice of their intention to resign are entitled to receive their pay on their final day of work. Some states require that, in addition to wages, employers pay terminating employees for accrued vacation time.
Please see the state Paychecks section.
In case of wage disputes, employers must pay the wages it concedes are due. Employees may file a wage claim with the commissioner of Labor to collect the rest. States may have their own laws on wage disputes.
Please see the state Paychecks section.
Both federal and state laws regulate payroll recordkeeping. Many states require employers to notify employees of all earnings and deductions for each pay period. The FLSA requires that employers keep certain information on file for each person on the payroll.
Exempt and nonexempt. The following information must be kept for both exempt and nonexempt personnel:
• Employee's full name, number, or identifying symbol (company identification (ID) number or Social Security number)
• Home address, including ZIP code
• Date of birth, if the employee is under the age of 19
• Sex, and occupation in which employed
• Time and day of week on which workweek begins
• Total wages paid each pay period
• Date of payment and the pay period covered by the payment
• Retroactive wage payment under government supervision
Nonexempt only. The following additional information must also be kept for nonexempt personnel only:
• For any week in which overtime pay is due, regular hourly rate of pay, the basis on which wages are paid, and regular rate exclusions
• Hours worked each workday and each workweek
• Total daily or weekly straight time earnings or wages
• Total premium pay for overtime hours
• Total additions to or deductions from wages paid in each pay period
• Factors other than gender that are the basis for payment of any wage differential to employees of differing sexes
Place of records. Employers must keep records safe and accessible at the place or places of employment, or at one or more established central recordkeeping offices where the records are customarily maintained. Where the records are maintained at a central recordkeeping office, other than in the place or places of employment, the records must be made available within 72 hours following notice from an administrator of the DOL or a duly authorized and designated representative.
Inspection of records. All records must be available for inspection and transcription by an administrator of the DOL or a duly authorized and designated representative.
Employers must display an official poster outlining the provisions of the Act, available at no cost from local offices of the Wage and Hour Division and toll-free, by calling (866) 4-US-WAGE (866-487-9243). This poster is also available electronically for downloading and printing at DOL's website at https://www.dol.gov/whd.
There are arguments both for and against the policy of advancing money to an employee. A loan may alleviate an employee's financial stress and the distraction it might cause in the workplace. On the other hand, some companies have decided that good employer/employee relationships are hard enough to maintain without the added complications of a lender/borrower relationship. Employers that do occasionally make advances against wages rarely consider making a loan to nonexecutive employees, except in an emergency, and then only when all conventional loan sources have been exhausted or are unavailable. Such an emergency situation might involve an employee learning of a family illness or death requiring immediate travel arrangements after banking hours. In some cases, employers may provide loans to employees if they do something the employer wishes; e.g., buy homes in neighborhoods or cities in order to revitalize them. Sometimes the employer will forgive these loans. Many companies that want to provide assistance in meeting employees' financial needs consider providing loans through a 401(k) plan or through participation in a credit union.
In order to set clear guidelines, no matter what they are, it is a good idea to adopt a policy that addresses loans to employees. The negative impact of a strict policy (e.g., that there will not be any pay advances under any circumstances) can be softened with an explanation of the reasoning for the rule. Exceptions to the general rule may be adopted. The policy should provide explicitly who has authority to make exceptions. Most employers usually authorize only one or two officers to grant loans. Other factors to address in a loan or advance policy include maximum loan amounts, interest rates, documentation, and payback provisions.
Truth in Lending Act (TILA). An employee loan may be subject to the federal TILA. This is primarily a disclosure statute, the purpose of which is to give the borrower information before receiving the loan. If the employer makes employee loans regularly, the act mandates credit charges be completely and conspicuously disclosed in dollars and cents and as an annual percentage rate. The penalties for violating truth-in-lending laws may be severe.
Tax and legal considerations. Employee loan programs, especially those that might be interest-free (or very low rate) are a popular incentive or fringe benefit for executive-level employees. Some companies allow these types of loans to be used to exercise stock options. Tax and securities laws are complex, so employers should consult a tax expert before making such loans to ensure that their program complies with applicable laws and is structured to benefit both the employer and the employee. For example, because the Internal Revenue Service (IRS) considers interest-free loans a form of compensation, both the employer and the employee may be required to pay additional taxes. Advances are not considered taxable wages if the employees are legally obligated to repay them, whether on demand, upon a specific date, or in installments.
Loan payback provisions. Whatever sort of loan the employer is making, there is the question of how to structure payback. The employer's preferred method of repayment is generally through payroll deduction. However, since there are laws in many states regulating payroll deductions, the employer must structure the payback according to the state's law on the question. The employer and employee may agree to a wage assignment, generally requiring a written assignment, agreed to in writing and signed by the employer. The employee may revoke the terms at any time on written notice to the employer.
Employee assistance program (EAP) assistance. Granting a loan to an employee who is in serious financial trouble may be a mistake for both the employer and the employee. Another loan usually won't solve this kind of problem and may lead to loss of a good employee if the repayment schedule cannot be met. However, providing help through an EAP, consumer credit counseling company, or bank or credit union (possibly providing a good reference for the employee to the bank) may lead to some resolution for the employee.
Advance Earned Income Credit (EIC). EIC is a federal tax credit for working families who meet certain income guidelines. Eligible families either pay less federal income tax or get a larger tax refund. Salary, wages, some disability benefits, and 401(k) contributions by the employer count as earned income under the EIC guidelines. Employers must give employees an advance portion of their earned income credit if the employee requests the advance, the employee qualifies for the credit, and the employee provides the employer with a completed Form W-5 for the tax year. The advance is to be included in the worker's paycheck. The employee, not the employer, is responsible for determining whether he or she is eligible for the credits.
Below-market loans. According to the IRS, a below-market loan is a loan made in connection with performance of work by employee for employer. A loan of more than $10,000 with an interest rate less than the applicable federal interest rate means that the employee has received additional compensation. If the loan is a demand loan (one in which the loan may be called at any time by the employer or where the interest rate rises to at least the market rate if the borrower terminates work), the imputed income is counted only when the outstanding balance exceeds $10,000. For a term loan (a loan for a specified period with a specified rate), if the outstanding balance is over $10,000 at any time, the employee difference between the federal interest rate and the employer-charged rate is considered income until the loan is paid off. There is an exception for an employee relocation loan at below-market rates. The loan will not be considered additional income to the employee if it is secured by a mortgage on the new principal residence or is a bridge loan payable within 14 days after settlement on the former home. Employers that make these loans must follow the letter of state (if applicable) and federal law; otherwise, employees may invoke the law to avoid loan repayment. Before making a below-market loan to employees, employers should consult a tax attorney.
Employer-Assisted Housing Loans (EAH). This is an employer-provided benefit, most commonly offered to an employee as a second mortgage on a new house, as a grant, forgivable loan, deferred or repayable loan, or as matched savings. The EAH program involves a partnership between the employer, Fannie Mae (a government program that provides financial services for home buyers), a lender, and the employee. The employer may provide help with a down payment or closing costs, or both, and information about completing the home-buying process. Fannie Mae helps the employer create the plan and identify lenders.
Loans from 401(k) plans. An increasingly popular way for employees to obtain a loan is by borrowing from their own 401(k)-plan account. Plans may be designed or amended to provide loans to participants. Allowing loans encourages lower-paid employees to participate in a 401(k) plan by giving employees tax-free access to the 401(k) accounts. An added incentive for employees is that 401(k)-plan loan repayments of both principle and interest go back to the employee's own account. The Internal Revenue Code (IRC) and the IRS regulations require that those 401(k) loans be available to all participants and beneficiaries on a reasonable equivalent basis; not be available to highly compensated employees in amounts greater than are available to other employees; have a reasonable rate of interest; be adequately secured; be consistent with plan provisions; be repaid over 5 years (up to 30 if the loan is used to purchase a borrower's principal residence); and be limited (assuming no prior loan was outstanding 1 year previously) to the lesser of 50 percent of the vested 401(k) account balance or $50,000. When an employee retires or terminates from the job, any unpaid amount of a 401(k) plan will be subject to federal (and perhaps state) income tax.
For additional information, employers may contact:
U.S. Department of Labor
Frances Perkins Building
200 Constitution Avenue, NW
Washington, DC 20210
866-487-9243
Last reviewed on July 1, 2018.
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