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Wages may include more than the money you receive in your weekly paycheck. Wages can include a variety of cash payment and employment benefits packages. The federal government sets minimum pay limits for some workers and requires employers to fairly compensate certain workers when they work an extensive numbers of hours, but not all workers receive the same wage protections.
What Are Wages?
The Internal Revenue Service (IRS) and the Code of Federal Regulations define wages in terms that extend beyond the money you receive in your paycheck. Wages include practically anything of value you receive from your employer, including salaries, hourly wages, fringe benefits, bonuses, tips and commissions. Employment benefits such as the use of a company car, expense accounts, gasoline allowances and profit sharing payments all meet the legal definition of wages. The law also deems cash withheld for Medicare taxes and income tax part of your wages.
Fair Labor Standards Act
The Fair Labor Standards Act of 1938 (FLSA) governs a wide range of work-related issues from the amount of wages an employer must pay you to the minimum age of workers. The U.S. Department of Labor’s Wage and Hour Division administers the law, which applies to private sector companies and most local, state and federal government employers. A slightly different set of rules governs some pay issues that relate to local- and state-employed law enforcement and firefighting personnel.
Exempt and Nonexempt Employees
The employment classifications “exempt” and “nonexempt” refer to FLSA protections. The FLSA’s wage and hour protections do not cover exempt employees, because most exempt workers receive a regular salary based on performing functions and tasks, not based on a specific number of worked hours.
Most nonexempt workers receive an hourly wage, which makes them eligible for FLSA hour and wage protections. Typically, nonexempt employees must track their work time, often using a computer program or time clock.
Minimum Wage and Other Hourly Wages
Hourly, nonexempt workers must receive an hourly pay rate of at least $7.25, which is the federal minimum wage. The federal minimum wage rate applies to nonexempt workers in all states. Its rate has remained unchanged since 2009. The FLSA stipulates that employers must pay nonexempt workers on established paydays, typically one time per week or once every two weeks.
Many states have established their own minimum wage rates that are higher than the federal minimum rate. Employers must comply with state and federal labor laws. In states that have a minimum wage rate higher than the federal rate, employers must pay the higher rate.
Thirty U.S. states, plus the District of Columbia, have higher minimum wage rates higher than the federal rate. Only two states, Wyoming and Georgia, have lower minimum wage rates than the federal rate. Five states have no established minimum wage rate and 14 states – plus Guam, the U.S. Virgin Islands and Puerto Rico – offer minimum wages equal to the federal rate.
Employers often pay unskilled and some skilled workers an hourly wage. Workers such as retail store cashiers, airport ground operations personnel and factory workers often receive hourly wages. Many employers offer an hourly rate higher than state or federal minimum wages. Providing an hourly wage higher than the minimum wage enables employers to compete with similar businesses in their industry and helps them retain good workers.
Nearly a century ago, the FLSA established the overtime pay requirements employers still follow. The law requires employers to pay their hourly employees overtime pay at a rate of 1.5 times their regular pay when they work more than 40 hours in a workweek. For example, if you work 41 hours in a workweek and you make $10 per hour, your employer must pay you $15 for the one hour that exceeds the standard 40 hour week. By law, your employer cannot average your worked hours over more than one workweek to avoid paying you the overtime rate. Likewise, an employee cannot claim overtime pay for working more than eight hours in a single day.
The FLSA does not limit the number of hours an employee can work and does not define on which days a workweek begins and ends. The law only stipulates the number of hours that constitute a workweek and does not give special consideration for work that takes place on weekends or holidays. For example, if your workweek begins Wednesday and ends Sunday, and you work just 40 hours, you are not entitled to overtime pay for working Saturday and Sunday. These wage and hour rules apply to federal law. Some state and local laws may provide workers even more wage and hour protections.
Employees who are paid salaries receive a specified amount of money for their work on regularly scheduled paydays. Many salaried workers are exempt, which means FLSA overtime protections do not apply to them.
Exempt employees typically make more than $455 per week and perform specific tasks which may or may not need to conform to a specific schedule. The worker and employer decide on the amount of the salary before the employee is hired. In many cases, the employer submits an offer letter or detailed contract that defines the employee’s salary and payday schedule.
Typically, employers do not require salaried employees to work a specific number of hours per week. One week, a salaried worker might work 46 hours and the following week he might work 36 hours. Unlike an hourly employee, the salaried worker receives the same pay for the 46-hour week and the 36-hour week.
While most company executives and people in middle management receive salaries rather than hourly wages, there are no hard and fast rules for the way employers pay other types of employees. For example, one call center might pay its customer service representatives $15 per hour, while another call center pays its employees a $31,200 per year salary. Both groups of employees earn the same income, based on a 40-hour workweek, but the FLSA wage and hour rules only apply to the hourly workers.
Under certain circumstances, an employer can deduct pay from an exempt salaried employee's paycheck. For example, if an employee does not go to work for two days because of a personal reason, the employer might have the right to deduct money from the employee's paycheck. Deductions in pay based on missed workdays often depend on the employer’s written personnel policies. If a company offers employees paid personal days, the worker could use that benefit to avoid deductions in her pay.
Some companies have policies that protect their exempt workers from excessive work hours. For example, an employer might implement a policy that allows an exempt employee to take a complimentary day off if he works more than 50 hours in a workweek. These “comp days” allow workers to enjoy the benefits of a regular salary while discouraging management from overworking their employees.
Employment contracts sometimes offer employees an annual salary for a job that does not require 12 months of work. For example, a high school teacher might work nine months a year but have the option to receive his salary in 12 monthly paychecks.
Commission-Based Salaries and Bonuses
Some workers receive a salary plus other types of wages such as commissions and bonuses. For example, a salesperson might earn an annual salary of $40,000 per year, plus a 2 percent commission on the amount of money the company receives for her sales. For instance, if Sally sells $100,000 in products during January, she receive a $2,000 commission check in addition to her regular salary. Employers often pay commissions on a monthly or quarterly basis.
Bonus wages work similarly but typically adhere to a predetermined amount of money. For example, a salesperson might receive a $500 bonus for every $100,000 in products he sells, or an entire staff might receive a bonus equal to 5 percent of their annual salaries if the company’s revenue increases during a particular period.
In markets with high employee turnovers, employers often offer certain workers bonuses based on longevity. For example, John’s contract might award him a $10,000 bonus for completing his first year of service and a $20,000 bonus on his two-year employment anniversary.
Some workers receive wages based on fees. For example, a wedding photographer might charge a couple $2,000 to photograph their wedding. The photographer may also charge additional fees for working more than a specified number of hours or working in adverse conditions. For example, the photographer might charge an addition $500 fee if her clients want to exchange their wedding vows while floating above the Earth in a hot-air balloon.
Fee-based workers, often called freelancers or independent contractors, receive their pay based on the terms of a contract. For instance, the wedding photographer’s contract with her clients might stipulate that she receive payment for half of her fees on the day of the wedding and payment for the balance within 30 days after the wedding date.
Freelance workers such as computer repairpersons, electricians, plumbers, academic tutors, writers and house painters typically work on a fee basis. The FLSA does not offer protections for freelance workers.
The IRS defines fringe benefits as wages. Fringe benefits include all benefits with a monetary value offered to workers by their employers. Examples of fringe benefits include paid sick leave, paid vacations and paid holidays. Typically, employers define the number of paid sick leave, vacation days and holidays their employees are entitled to take. For example, an insurance company might offer its employees five paid sick leave days per year, along with 10 paid vacation days and 10 paid holidays. Other types of paid days off might include floating holidays and personal days.
Federal labor law does not require employers to pay workers for days that they do not work, but many employers offer these benefits to reward their workers and compete with other employers. According to a 2017 U.S. Department of Labor survey, more than 70 percent of workers receive paid sick leave, holiday pay and paid vacations. However, these benefits often apply only to full-time employees. Fewer than half of part-time workers receive paid vacation days, sick leave or holidays.
Some companies are required to comply with the Family and Medical Leave Act (FMLA), which allows employees to take time off from work for situations such as illness of a spouse, child or parent. However, the law only requires employers to offer their employees unpaid leave.
Other types of fringe benefits include health insurance, expense accounts, use of company automobiles, mass transit passes, personal automobile allowances and hotel accommodations during business trips. Employers often negotiate discounts on products or services with other companies. For example, employees of a computer manufacturing company might receive a 20 percent discount when they book a room with a certain hotel chain or buy an airline ticket with a particular air carrier. By law, these types of benefits are part of a worker’s wages.
Some workers receive severance pay if their company terminates them for a reason without cause. For example, if Sally’s company lays her off due to downsizing, they might offer her severance pay for three months following the date of her termination. Often, severance pay includes a portion of the employee’s regular pay, plus an extension of certain benefits such as health insurance. Employers design severance packages to help the employee avoid serious financial hardship during an employment gap.
The FLSA does not require employers to offer severance pay to terminated employees. However, the IRS deems severance pay and benefits wages.
Sorting Out Wages at Tax Time
Accounting for various types of wages might make your head spin when tax season rolls around. After all, benefits such as health insurance count as part of your wages but also require you to spend part of your income. If you receive numerous employment benefits, consider consulting a tax professional or itemize your taxes on your tax return. Otherwise, you might pay too much of your money for taxes.
- Cornell Law School: Meaning of 'Wages'
- Internal Revenue Service: ITG FAQ #6 Answer-What Are 'Qualified Wages'?
- U.S. Department of Labor: Handy Reference Guide to the Fair Labor Standards Act
- U.S. Department of Labor: Wages
- U.S. Department of Labor: Compliance Assistance - Wages and the Fair Labor Standards Act (FLSA)
- FindLaw: Exempt Employees vs. Nonexempt Employees
- U.S. Department of Labor: Minimum Wage
- U.S. Department of Labor: Minimum Wage Laws in the States
- U.S. Department of Labor: Overtime Pay
- U.S. Department of Labor: Fact Sheet #17G: Salary Basis Requirement
- US Legal: Fringe Benefits Law and Legal Definition
- U.S. Department of Labor: Sick Leave
- U.S. Department of Labor: Vacation Leave
- U.S. Department of Labor: Holiday Pay
- U.S. Department of Labor: Employee Benefits Survey
- Internal Revenue Service: Topic Number 401 - Wages and Salaries
- U.S. Department of Labor: Severance Pay
- US Legal: Severance Package Law and Legal Definition
- Forbes: Is a Commission-Based Job Right for You?