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4.1: Gross Earnings (Off to Work You Go)

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    22083
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    You work hard at your job, and you want to be compensated properly for all the hours you put in. Assume you work full time with an hourly rate of pay of $10. Last week you worked eight hours on Sunday and eight hours on Monday, which was a statutory holiday. Then you took Tuesday off, worked eight hours on each of Wednesday and Thursday, took Friday off, and worked 10 hours on Saturday. That's a total of 42 hours of work for the week. What is your gross pay? Give or take a small amount depending on provincial employment standards, it should be about $570. But if you don't understand how to calculate gross earnings, you could be underpaid without ever realizing it.

    Here are some notes about the content in this chapter: About 10% of Canadian workers fall under federal employment standards, which are not discussed here. This textbook generalizes the most common provincial employment standards; however, to calculate your earnings accurately requires you to apply your own provincial employment standards legislation. Part-time employment laws are extremely complex, so this textbook assumes in all examples that the employee is full time.

    This section addresses the calculation of gross earnings, which is the amount of money earned before any deductions from your paycheque. The four most common methods of employee remuneration include salaries, hourly wages, commissions, and piecework wages.

    Salary and Hourly Wages

    One ad in the employment classifieds indicates compensation of $1,270 biweekly, while a similar competing ad promotes wages of $1,400 semi-monthly. If both job ads are similar in every other way, which job has the higher annual gross earnings? To make this assessment, you must understand how salaries work. A salary is a fixed compensation paid to a person on a regular basis for services rendered. Most employers pay employees by salary in occupations where the employee's work schedule generally remains constant.

    In contrast, an hourly wage is a variable compensation based on the time an employee has worked. In contrast to a salary, this form of compensation generally appears in occupations where the number of hours is unpredictable or continually varies from period to period.

    Employment Contract Characteristics[1]

    Salaried and hourly full-time employees are similar with regard to their gross earnings. The major earnings issues in an employment contract involve regular earnings structure, overtime, and holidays.

    Regular Earnings Structure

    An agreement with your employer outlines the terms of your employment, including the time frame and frequency of pay.

    1. Time Frame. For salaried employees, the time frame that the salary covers must be clearly stated. For example, you could receive a salary of $2,000 monthly or $50,000 annually. Notice that each of these salaries is followed by the specific time frame for the compensation. For hourly employees, the time frame requires identification of the wage earned per hour.
    2. Frequency. How often the gross earnings are paid out to the employee must be defined.
      • Monthly: Earnings are paid once per month. By law, employees must receive compensation from their employer at least once per month, which equals 12 times per year.
      • Daily: Earnings are paid at the end of every day. This results in about 260 paydays per year (5 days per week multiplied by 52 weeks per year). In a leap year, there might be one additional payday.
      • Weekly: Earnings are paid once every week. This results in 52 paydays in any given year since there are 52 weeks per year.
      • Biweekly: Earnings are paid once every two weeks. This results in 26 paydays in any given year since there are \(52 \div 2=26\) biweekly periods per year.
      • Semi-monthly: Earnings are paid twice a month, usually every half month (meaning on the 15th and last day of the month). This results in 24 paydays per year.

    Thus, the earnings structure specifies both the time frame and the frequency of earnings. For a salaried employee, this may appear as “$2,000 monthly paid semi-monthly” or “$50,000 annually paid biweekly.” For an hourly employee, this may appear as “$10 per hour paid weekly.” No matter whether you are salaried or hourly, earnings determined by your regular rate of pay are called your regular earnings.

    Overtime

    Overtime is work time in excess of your regular workday, regular workweek, or both. In most jurisdictions it is paid at 1.5 times your regular hourly rate (called time-and-a-half), though your company may voluntarily pay more or a union may have negotiated a more favorable rate such as two times your regular hourly rate (called double time). A contract with an employer will specify your regular workday and workweek, and some occupations are exempt from overtime. Due to the diversity of occupations, there is no set rule on what constitutes a regular workday or workweek. In most jurisdictions, a regular workweek is eight hours per day and 40 hours per week. Once you exceed these regular hours, you are eligible to receive overtime or premium earnings, which are based on your overtime rate of pay.

    Holidays

    A statutory holiday is a legislated day of rest with pay. Five statutory holidays are recognized throughout Canada, namely, New Year's Day, Good Friday (or Easter Monday in Quebec), Canada Day, Labour Day, and Christmas Day. Each province or territory has an additional four to six public holidays (or general holidays), which may include Family Day (known as Louis Riel Day in Manitoba and Islander Day in PEI) in February, Victoria Day in May, the Civic Holiday in August, Thanksgiving Day in October, Remembrance Day in November, and Boxing Day in December. These public holidays may or may not be treated the same as statutory holidays, depending on provincial laws.

    Statutory and public holidays generally require employees to receive the day off with pay. If the holiday falls on a nonworking day, it is usually the next working day that is given off instead. For example, if Christmas Day falls on a Saturday, typically the following Monday is given off with pay. Here's how holidays generally work (though you should always consult legislation for your specific jurisdiction):

    • You should be given the day off with pay, called holiday earnings. The holiday earnings are in the amount of a regular day's earnings, and the hours involved count toward your weekly hourly totals for overtime purposes (preventing employers from shifting your work schedule that week).
    • If you are required to work, the employer must offer another day off in lieu with pay. Your work on the statutory holiday is then paid at regular earnings and the hours involved contribute toward your weekly hourly totals for overtime purposes. You are paid holiday earnings on your future day off.
    • If you are required to work and no day or rest is offered in lieu, this poses the most complex situation. Under these conditions:
      • You are entitled to the holiday earnings you normally would have received for the day off. The hours that make up your holiday earnings contribute toward your weekly hourly totals for overtime purposes (again, consult your local jurisdiction).
      • In addition, for the hours you worked on the statutory holiday you are entitled to overtime earnings known as statutory holiday worked earnings. These hours do not contribute toward your weekly hourly totals for overtime purposes since you are already compensated at a premium rate of pay. For example, assume you work eight hours on Labour Day, your normal day is eight hours, and you won't get another day off in lieu. Your employer owes you the eight hours of holiday earnings you should have received for getting the day off plus the eight hours of statutory holiday worked earnings for working on Labour Day.

    The Formula

    The four forms of compensation consist of regular earnings, overtime earnings, holiday earnings, and statutory holiday worked earnings. Add these four elements together to determine total gross earnings. Formula 4.1 shows the relationship.

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    Formula 4.1

    How It Works

    Salaried Employees

    To calculate the total gross earnings for a salaried employee, follow these steps:

    Step 1: Analyze the employee's work performed and assign hours as needed into each of the four categories of pay. If the employee has only regular hours of pay, skip to step 6.

    Step 2: Calculate the employee's equivalent hourly rate of pay. This means converting the salary into an equivalent hourly rate:

    \[\text { Equivalent Hourly Rate }=\dfrac{\text { Annual Salary }}{\text { Annual Hours Worked }}\nonumber \]

    For example, use a $2,000 monthly salary requiring 40 hours of work per week. Express the salary annually by multiplying it by 12 months, yielding $24,000. Express the 40 hours per week annually by multiplying by 52 weeks per year, yielding 2,080 hours worked. The equivalent hourly rate is \(\$ 24,000 \div 2,080=\$ 11.538461\).

    Step 3: Calculate any holiday earnings. Take the unrounded hourly rate and multiply it by the number of hours in a regular shift, or

    \[\text { Holiday Earnings }=\text { Unrounded Hourly Rate } \times \text { Hours in a Regular Shift }\nonumber \]

    A salaried employee earning $11.538461 per hour having a daily eight-hour shift receives \(\$ 11.538461 \times 8=\$ 92.31\) in holiday earnings.

    Step 4: Calculate any overtime earnings.

    1. Determine the overtime hourly rate of pay by multiplying the unrounded hourly rate by the minimum standard overtime factor of 1.5 (this could be higher if the company pays a better overtime rate than this):\[\text { Overtime Hourly Rate }=\text { Unrounded Hourly Rate } \times 1.5\nonumber \]
    2. Round the final result to two decimals. For the salaried worker, \(\$ 11.538461 \times 1.5=\$ 17.31\) per overtime hour.
    3. Multiply the overtime hourly rate by the overtime hours worked.

    Step 5: Calculate any statutory holiday worked earnings which is similar to calculating overtime earnings:

    \[\text { Statutory Holiday Worked Earnings = Statutory Hourly Rate } \times \text { Statutory Hours Worked }\nonumber \]

    The statutory hourly rate is at minimum 1.5 times the unrounded hourly rate of pay. The salaried employee working eight hours on a statutory holiday receives \(\$ 17.31 \times 8=\$ 138.48\).

    Step 6: Calculate the gross earnings paid at the regular rate of pay. Take the amount of the salary and divide it by the number of pay periods involved, then subtract any holiday earnings:

    \[\text { Regular Earnings }=\dfrac{\text { Salary }}{\text { Pay Periods }}-\text { Holiday Earnings }\nonumber \]

    You need to calculate the number of pay periods based on the regular earnings structure. For example, an annual $52,000 salary paid biweekly would have 26 pay periods annually. Therefore, a regular paycheque is \(\$ 52,000 \div 26=\$ 2,000\) per paycheque. As another example, a \(\$2,000\) monthly salary paid semi-monthly has two pay periods in a single month, resulting in regular earnings of \(\$ 2,000 \div 2=\$ 1,000\) per paycheque. If a holiday is involved in the pay period, you must deduct the holiday earnings from these amounts.

    Step 7: Calculate the total gross earnings by applying Formula 4.1.

    Hourly Employees

    To calculate the total gross earnings for an hourly employee, follow steps similar to those for the salaried employee:

    Step 1: Analyze the employee's work performed and assign hours as needed into each of the four categories of pay. It is usually best to set up a table similar to the one below. This table allows you to visualize the employee's week at a glance along with totals, enabling proper assessment of their hours worked.

    This table separates the four types of earnings into different rows. Enter the information into the table about the employee's workweek, placing it in the correct day and on the correct row. If any daily thresholds are exceeded, place the appropriate hours into the overtime row. Once you have completed this, total the regular hours and holiday hours for the week and check to see if they exceed any regular weekly threshold. If so, starting with the last workday of the week and working backwards, convert regular hours into overtime hours until you have reduced the regular hours to the regular weekly total.

    Type of Pay Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Hours Rate of Pay Earnings
    Regular
    Holiday
    Overtime
    Holiday Worked
    Total Earnings

    Once you have completed the table, if the employee has only regular hours of pay, skip to step 5. Otherwise, proceed with the next step.

    Step 2: Calculate any holiday earnings. Take the hourly rate and multiply it by the number of hours in a regular shift:

    \[\text { Holiday Earnings }=\text { Hourly Rate } \times \text { Hours in a Regular Shift }\nonumber \]

    Step 3: Calculate any overtime earnings.

    1. Determine the overtime hourly rate of pay rounded to two decimals by multiplying the hourly rate by the minimum standard overtime factor of 1.5 (or higher).\[\text { Overtime Hourly Rate }=\text { Hourly Rate } \times 1.5\nonumber \]
    2. Multiply the overtime hourly rate by the overtime hours worked.

    Step 4: Calculate any statutory holiday worked earnings. This is the same procedure as for a salaried employee.

    Step 5: Calculate the gross earnings paid at the regular rate of pay. Take the number of hours worked and multiply it by the hourly rate of pay:

    \[\text { Regular Earnings }=\text { Hours Worked } \times \text { Hourly Rate }\nonumber \]

    For example, 20 hours worked at 10 per hour with no holiday earnings is \(20 \times \$ 10=\$ 200\).

    Step 6: Calculate the total gross earnings by applying Formula 4.1.

    Things To Watch Out For

    Be careful about the language of the payment frequency. It is very common to confuse semi and bi, and sometimes businesses use the terms incorrectly. The term semi generally means half. Therefore, to be paid semi-monthly means to be paid every half month. The term bi means two. Therefore, to be paid biweekly means to be paid every two weeks. Some companies that pay semi-monthly mistakenly state that they pay bimonthly, which in fact would mean they paid every two months.

    Paths To Success

    In calculating the pay for a salaried employee, this textbook assumes for simplicity that a year has exactly 52 weeks. In reality, there are 52 weeks plus one day in any given year. In a leap year, there are 52 weeks plus two days. This extra day or two has no impact on semi-monthly or monthly pay, since there are always 24 semi-months and 12 months in every year. However, weekly and biweekly earners are impacted as follows:

    • If employees are paid weekly, approximately once every six years there are 53 pay periods in a single year. This would "reduce" the employees’ weekly paycheque in that year. For example, assume they earn $52,000 per year paid weekly. Normally, they are paid \(\$ 52,000 \div 52=\$ 1,000\) per week. However, since there are 53 pay periods approximately every sixth year, this results in \(\$ 52,000 \div 53=\$ 981.13\) per week for that year.
    • If employees are paid biweekly, approximately once every 12 years there are 27 pay periods in a single year. This has the same effect as the extra pay period above. For example, if they are paid \(\$52,000\) per year biweekly they normally receive \(\$ 52,000 \div 26=\$ 2,000\) per biweekly cheque. Approximately every twelfth year, they are paid \(\$ 52,000 \div 27=\$ 1,925.93\) per biweekly cheque for that year.

    Many employers ignore these technical nuances in pay structure since the extra costs incurred to modify payroll combined with the effort required to calm down employees who don’t understand the smaller paycheque are not worth the savings in labour. Therefore, most employers treat every year as if it has 52 weeks (26 biweeks) regardless of the reality. In essence, employees receive a bonus paycheque approximately once every six or twelve years!

    Exercise \(\PageIndex{1}\): Give It Some Thought

    A salaried employee whose normal workweek is 8 hours per day and 40 hours per week works 8 hours each day from Monday to Saturday inclusive, where Monday was a statutory holiday. Which of the following statements is correct (assuming she will not get another day off in lieu of the holiday)?

    1. The employee receives only her regular weekly earnings for 40 hours.
    2. The employee receives 32 hours of regular earnings, 8 hours of holiday earnings, 8 hours of overtime earnings, and 8 hours of statutory holiday worked earnings.
    3. The employee receives 40 hours of regular earnings, 8 hours of overtime earnings, and 8 hours of statutory holiday worked earnings.
    4. The employee receives 40 hours of regular earnings and 8 hours of overtime earnings.
    Answer

    The correct answer is b. When working on the statutory holiday and not getting another day off in lieu, the salaried employee is eligible for eight hours of holiday earnings plus eight hours of statutory holiday worked earnings. The holiday earnings count toward the weekly total, but not the statutory holiday worked earnings. Thus the employee from Tuesday to Friday inclusive worked an additional 32 regular hours, bringing her weekly total to 40 hours. The work on Saturday exceeds her 40 hour workweek, and therefore all eight hours are paid as overtime earnings.

    Example \(\PageIndex{1}\): Salary with Overtime and a Holiday

    Tristan is compensated with an annual salary of $65,000 paid biweekly. His regular workweek consists of four 10-hour days, and he is eligible for overtime at 1.5 times pay for any work in excess of his regular requirements. Tristan worked regular hours for the first two weeks. Over the next two weeks, Tristan worked his regular hours and became eligible for 11 hours of overtime. During these two weeks, he worked his regular shift on Good Friday but his employer has agreed to give him another day off with pay in the future.

    1. Determine Tristan's gross earnings for the first two-week pay period.
    2. Determine Tristan's gross earnings for the second two-week pay period.

    Solution

    You have been asked to calculate Tristan's gross earnings, or GE, for two consecutive pay periods.

    What You Already Know

    Step 1:

    You know Tristan's compensation:

    Annual Salary = $65,000

    Pay Periods = biweekly = 26 times per year

    \(\text { Annual Hours }=10 / \text {day} \times 4 \text { days/week } \times 52 \text { weeks }=2,080\)

    You also know his work schedule:

    First Two Weeks = regular pay

    Overtime in First Two Weeks = 0

    Second Two Weeks = regular pay

    Overtime in Second Two Weeks = 11 hours

    There is a holiday in the second two weeks, but he will receive another day off in lieu.

    How You Will Get There

    For each biweekly pay period, apply the following steps:

    Step 2: Calculate Tristan’s equivalent hourly rate of pay.

    Step 3: Calculate holiday earnings using the equivalent hourly rate.

    Step 4: Calculate overtime earnings by taking the overtime hourly pay rate multiplied by hours worked.

    Step 5: Calculate statutory holiday worked earnings at the premium rate of pay.

    Step 6: Calculate regular earnings:

    Step 7: Determine total gross earnings using Formula 4.1.

    Perform

    Step 2:

    First two weeks:

    There are only regular earnings; skip to step 6.

    \(\text { Equivalent Hourly Rate }=\dfrac{\$ 65,000}{2,080}=\$ 31.25\)

    Step 3:

    Holiday earnings = $0

    Tristan will take his holiday pay another day. Therefore, he is not eligible for this pay, and his work counts as regular hours; holiday earnings = $0

    Step 4:

    First two weeks:

    Overtime earnings = $0

    \(\text { Overtime hourly rate }=\$ 31.25 \times 1.5=\$ 46.88\)

    \(\text { Overtime Earnings }=\$ 46.88 \times 11=\$ 515.68\)

    Step 5:

    Statutory Worked = $0

    Second two weeks:

    Since Tristan is receiving another day off in lieu, he is not eligible for this pay; statutory Worked = $0

    Step 6:

    \(\text { Regular Earnings }=\dfrac{\$ 65,000}{26}-\$ 0=\$ 2,500\)

    Second two weeks:

    \(\text { Regular Earnings }=\dfrac{\$ 65,000}{26}-\$ 0=\$ 2,500\)

    Step 7:

    \(GE=\$ 2,500+\$ 0+\$ 0+\$ 0=\$ 2,500\)

    Second two weeks:

    \(GE=\$ 2,500+\$ 515.68+\$ 0+\$ 0=\$ 3,015.68\)

    For the first two-week pay period, Tristan worked only his regular hours and therefore is compensated $2,500 as per his salary. For the second two-week pay period, Tristan is eligible to receive his regular hours plus his overtime, but he receives no additional pay for the worked holiday since he will receive another day off in lieu. His total gross earnings are $3,015.68.

    Example \(\PageIndex{2}\): A Week in the Life of an Hourly Wage Earner

    Marcia receives an hourly wage of $32.16 working on an automotive production line. Her union has negotiated a regular work day of 7.25 hours for five days totalling 36.25 hours for the week. Overtime is paid at 1.5 times her regular rate for any work that exceeds the daily or weekly limits. If work is required on a statutory holiday, her company does not give a day off in lieu and pays a premium rate of 2.5 times her regular rate. Last week, Marcia worked nine hours on Monday, her regular hours on Tuesday through Friday inclusive, and three hours on Saturday. Friday was a statutory holiday. Calculate Marcia's gross earnings for the week.

    Solution

    You need to calculate Marcia's gross earnings, or \(GE\), for the week.

    What You Already Know

    Step 1: You know Marcia's pay structure and workweek:

    Regular Hourly Rate = $32.16

    Overtime Hourly Pay = 1.5 times

    Statutory Holiday Worked Rate = 2.5 times

    Exceeding 7.25 hours daily or 36.25 hours weekly is overtime.

    Sunday 0
    Monday 9
    Tuesday 7.25
    Wednesday 7.25
    Thursday 7.25
    Friday (Statutory holiday) 7.25
    Saturday 3

    How You Will Get There

    Step 1 (continued): Take Marcia's hours and place them into the table. Assess whether any daily or weekly totals are considered overtime and make any necessary adjustments.

    Step 2: Calculate holiday earnings using the hourly rate.

    Step 3: Calculate overtime earnings by determining the overtime hourly rate of pay multiplied by hours worked.

    Step 4: Calculate statutory holiday worked earnings at the premium rate of pay.

    Step 5: Calculate regular earnings.

    Step 6: Determine total gross earnings.

    Perform

    Step 1:

    Type of Pay Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Hours Rate of Pay Earnings
    Regular 0 (1)7.25 7.25 7.25 7.25 3 (3)39.25 $32.16
    Holiday (2)7.25
    Overtime (1)7.25 1.75
    Holiday Worked (2)7.25 7.25
    Total Earnings
    1. She worked nine hours. Therefore, the first 7.25 hours are regular pay and the last 1.75 are overtime pay.
    2. Friday was a statutory holiday, and she will not receive another day off in lieu. She must receive statutory holiday worked pay in addition to her hours worked.
    3. Note the weekly total of 36.25 has been exceeded by three hours. Move Saturday's hours into overtime.

    The following table is the final layout of her workweek:

    Type of Pay Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Hours Rate of Pay Earnings
    Regular 0 7.25 7.25 7.25 7.25 36.25 $32.16
    Holiday 7.25
    Overtime 1.75 3 4.75
    Holiday Worked 7.25 7.25
    Total Earnings

    Steps 2–6:

    Explanations are noted in the table below.

    Type of Pay Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Hours Rate of Pay Earnings
    Regular 0 7.25 7.25 7.25 7.25 36.25 $32.16 (4)$932.64
    Holiday 7.25 (1)$233.16
    Overtime 1.75 3 4.75 (2)$48.24 (2)$229.14
    Holiday Worked 7.25 7.25 (3)$80.40 (3)$582.90
    Total Earnings (5)$1,977.84
    1. \(\text { Holiday Earnings }=7.25 \times \$ 32.16=\$ 233.16\)
    2. \(\text { Overtime Hourly Rate }=\$ 32.16 \times 1.5=\$ 48.24 ; \text { Overtime Earnings }=4.75 \times \$ 48.24=\$ 229.14\)
    3. \(\text { Statutory Holiday Worked Rate }=\$ 32.16 \times 2.5=\$ 80.40\); \(\text { Statutory Worked Earnings }=7.25 \times \$ 80.40=\$ 582.90\)
    4. \(\text { Regular Earnings }=29 \times \$ 32.16=\$ 932.64\)
    5. \(GE=\$ 932.64+\$ 229.14+\$ 233.16+\$ 582.90=\$ 1,977.84\)

    Marcia will receive total gross earnings of $1,977.84 for the week.

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    Commission

    Over the last two weeks you sold $50,000 worth of machinery as a sales representative for IKON Office Solutions Canada. IKON’s compensation plan involves a straight commission rate of 3.5%. What are your gross earnings? If you sold an additional $12,000 in machinery, how much more would you earn?

    Particularly in the fields of marketing and customer service, many workers are paid on a commission basis. A commission is an amount or a fee paid to an employee for performing or completing some form of transaction. The commission typically takes the form of a percentage of the dollar amount of the transaction. Marketing and customer service industries use this form of compensation as an incentive to perform: If the representative doesn’t sell anything then the representative does not get paid. Issues to be discussed about commission include what constitutes regular earnings, how to handle holidays and overtime, and the three different types of commission structures.

    • Regular Earnings. All commissions are considered to be regular earnings. To calculate the gross earnings for an employee, take the total amount of the transactions and multiply it by the commission rate:\[\text { Gross Earnings }=\text { Total Transaction Amount } \times \text { Commission Rate }\nonumber \]This is not a new formula. It is a specific application of Formula 2.2: Rate, Portion, Base. In this case, the Base is the total amount of the transactions, the Rate is the commission rate, and the Portion is the gross earnings for the employee.
    • Holidays and Overtime. Commission earners are eligible to receive overtime earnings, holiday earnings, and statutory holiday worked earnings. However, the provincial standards on these matters vary widely and the mathematics involved do not necessarily follow any one procedure or calculation. As such, this textbook leaves these issues to be covered in a payroll administration course.
    • Types of Commission. Commission earnings typically follow one of the following three structures:
      • Straight Commission. If your entire earnings are based on your dollar transactions and calculated strictly as a percentage of the total, you are on straight commission. An application of Formula 2.2 (Rate, Portion, Base) calculates your gross earnings under this structure.
      • Graduated Commission. Within a graduated commission structure, you are offered increasing rates of commission for higher levels of performance. The theory behind this method of compensation is that the higher rewards motivate employees to perform better. An example of a graduated commission scale is found in the table below.
    Transaction Level Commission Rate
    $0–$100,000.00 3%
    $100,000.01–$250,000.00 4.5%
    $250,000.01–$500,000.00 6%
    Over $500,000.00 7.5%

    Recognize that the commission rates are applied against the portion of the sales falling strictly into the particular category, not the entire balance. Thus, if the total sales equal $150,000, then the first $100,000 is paid at 3% while the next $50,000 is paid at 4.5%.

    • Salary Plus Commission. If your earnings combine a basic salary together with commissions on your dollar transactions, you have a salary plus commission structure. No new mathematics are required for this commission type. You must combine salary calculations, discussed earlier in this section, with either a straight commission or graduated commission, as discussed above. Usually this form of compensation pays the lowest commission rate since a basic salary is already provided.

    How It Works

    Follow these steps to calculate commission earnings:

    Step 1: Determine which commission structure is used to pay the employee. Identify information on commission rates, graduated scales, and any salary.

    Step 2: Determine the dollar amounts that are eligible for any particular commission rate and calculate commissions.

    Step 3: Sum all earnings from every eligible commission rate plus any salary.

    Let’s assume $380,000 of merchandise is sold. Using the previous table as our graduated commission scale, calculate commission earnings.

    clipboard_e2a2390ccee6cc1e1c2825bf378937947.png

    Step 1: Sales total $380,000 and all commission rates and scales are found in the table.

    Step 2: The first $100,000 is compensated at 3%, equaling $3,000. The next $150,000 is compensated at 4.5%, equaling $6,750. The last $130,000 is compensated at 6%, equaling $7,800. There is no compensation at the 7.5% level since sales did not exceed $500,000.

    Step 3: The total commission on sales of $380,000 is \(\$ 3,000+\$ 6,750+\$ 7,800=\$ 17,550\).

    Example \(\PageIndex{3}\): Different Types of Commissions

    Josephine is a sales representative for Kraft Foods Canada. Over the past two weeks, she closed $325,000 in retail distribution contracts. Calculate the total gross earnings that Josephine earns if

    1. She is paid a straight commission of 3.45%.
    2. She is paid 2% for sales on the first $100,000, 3% on the next $100,000, and 4% on all remaining sales.
    3. She is paid a base salary of $2,000 plus a commission of 3.5% on all sales above $100,000.

    Solution

    You need to calculate the gross earnings, or \(GE\), for Josephine under various commission structures.

    What You Already Know

    Step 1:

    For all three options, total sales = $325,000

    a. This is a straight commission where the commission rate = 3.45%.

    b. This is a graduated commission, structured as follows:

    Sales Level Rate
    $0–$100,000.00 2%
    $100,000.01–$200,000.00 3%
    $200,000.01 and above 4%

    c. This is a salary plus graduated commission, with salary = $2,000 and a graduated commission structure as follows:

    Sales Level Rate
    $0–$100,000.00 0%
    $100,000.01 and above 3.5%

    How You Will Get There

    Step 2:

    Determine the sales eligible for each commission and calculate total commissions. Note that all calculations are \(\text {Portion}=\text {Rate} \times \text {Base}\).

    Step 3:

    Sum all commissions plus any salary to calculate total gross earnings.

    Perform

    Steps 2 & 3:

    a. \(3.45 \% \times \$ 325,000=0.0345 \times \$ 325,000=\$ 11,212.50=\text { Total Gross Earnings }\)

    b.

    Sales Level Rate Eligible Sales at Each Rate Commission Earned
    $0–$100,000.00 2% $100,000 – $0 = $100,000 0.02 × $100,000 = $2,000
    $100,000.01–$200,000.00 3% $200,000 – $100,000 = $100,000 0.03 × $100,000 = $3,000
    $200,000.01 and above 4% $325,000 – $200,000 = $125,000 0.04 × $125,000 = $5,000

    \(\text { Total Gross Earnings }=\$ 2,000+\$ 3,000+\$ 5,000=\$ 10,000\)

    c. \(\text { Recall Base Salary }=\$ 2,000\)

    Sales Level Rate Eligible Sales at Each Rate Commission Earned
    $0–$100,000.00 0% $100,000 – $0 = $100,000 0 × $100,000 = $0
    $100,000.01 and above 3.5% $325,000 – $100,000 = $225,000 0.035 × $225,000 = $7,875

    \(\text { Total Gross Earnings }=\$ 0+\$ 7,875+\$ 2,000=\$ 9,875\)

    If Josephine is paid under straight commission, her total gross earnings will be $11,212.50. Under the graduated commission, she will receive $10,000 in total gross earnings. For the salary plus commission, she will receive $9,875 in total gross earnings.

    clipboard_e4f1348507013130a8f29f44b046b0c43.png

    Piecework

    Have you ever heard the phrase "pay-for-performance"? Although this phrase has many interpretations in different industries, for some people this phrase means that they get paid based on the quantity of work that they do. For example, many workers in clothing manufacturing are paid a flat rate for each article of clothing they produce. As another example, employees in fruit orchards may get paid by the number of pieces of fruit that they harvest, or simply by the kilogram. As you can see, these workers are neither salaried nor paid hourly, nor are they on commission. They earn their paycheque for performing a specific task. Therefore, a piecework wage compensates such employees on a per-unit basis.

    This section focuses on the regular earnings only for piecework wage earners. Similar to workers on commission, piecework earners are eligible to receive overtime earnings, holiday earnings, and statutory holiday worked earnings. However, the standards vary widely from province to province, and there is not necessarily any one formula to calculate these earnings. As with commissions, this textbook leaves those calculations for a payroll administration course.

    The Formula

    To calculate the regular gross earnings for a worker paid on a piecework wage, you require the piecework rate and how many units they are to be paid for:

    \[\text { Gross Earnings = Piecework Rate } \times \text { Eligible Units }\nonumber \]

    This is not a new formula but another application of Formula 2.2 (Rate, Portion, Base). The Piecework Rate is the Rate, the Eligible Units are the Base, and the Gross Earnings are the Portion.

    How It Works

    To calculate an employee’s gross earnings for piecework, follow these steps:

    Step 1: Identify the piecework rate and the level of production or units.

    Step 2: Perform any necessary modifications on the production or units to match how the piecework is paid.

    Step 3: Calculate the commission gross earnings by multiplying the rate by the eligible units.

    Assume that Juanita is a piecework earner at a blue jean manufacturer. She is paid daily and earns $1.25 for every pair of jeans that she sews. On a given day, Juanita sewed 93 pairs of jeans. Her gross earnings are calculated as follows:

    Step 1: Her piecework rate = $1.25 per pair with production of 93 units.

    Step 2: The rate and production are both expressed by the pair of jeans. No modification is necessary.

    Step 3: Her gross piecework earnings are the product of the rate and units produced, or \(\$ 1.25 \times 93=\$ 116.25\).

    Things To Watch Out For

    Pay careful attention to step 2 in the procedure. In some industries, the piecework rate and the units of production do not match. For example, a company could pay a piecework rate per kilogram, but a single unit may not represent a kilogram. This is typical in some canning industries, where workers are paid per kilogram for canning the products, but the cans may only be 200 grams in size. Therefore, if workers produce five cans, they are not paid for five units produced. Rather, they are paid for only one unit produced since five cans \(\times 200 \mathrm{g}=1,000 \mathrm{g}=1 \mathrm{kg}\). Before calculating piecework earnings, ensure that both the piecework rate and the eligible units are in the same terms, whether it be metric tonnes, kilograms, or otherwise.

    Example \(\PageIndex{4}\): A Telemarketer Earning Piecework Wages

    In outbound telemarketing, some telemarketers are paid on the basis of "completed calls." This is not commission since their pay is not based on actually selling anything. Rather, a completed call is defined as simply any phone call for which the agent speaks with the customer and a decision is reached, regardless of whether the decision was to accept, reject, or request further information. If a telemarketer produces five completed calls per hour and works 7½-hour shifts five times per week, what are the total gross earnings she can earn over a biweekly pay period if her piecework wage is $3.25 per completed call?

    Solution

    We are looking for the total gross earnings, or \(GE\), for the telemarketer over the biweekly pay period.

    What You Already Know

    Step 1:

    The frequency of the telemarketer's pay, along with her hours of work, piecework wage, and unit of production are known:

    Piecework Rate = $3.25 per completed call

    Hourly Units Produced = 5

    Hours of Work = 7½ hours per day, five days per week

    Frequency of Pay = biweekly

    How You Will Get There

    Step 2:

    You must determine the telemarketer’s production level. Calculate how many completed calls she achieves per biweekly pay period:

    \[\text { Eligible Units }=\text { Units Produced per Hour } \times \text { Hours per Day } \times \text { Days per Week } \times \text { Weeks }\nonumber \]

    Step 3:

    Apply Formula 2.2 (adapted for piecework wages) to get the portion owing.

    Perform

    Step 2:

    \[\text { Eligible Units }=1.5 \times 7.5 \times 5 \times 2=375\nonumber \]

    Step 3:

    \[GE=\$ 3.25 \times 375=\$ 1,218.75\nonumber \]

    Over a biweekly period, the telemarketer completes 375 calls. At her piecework wage, this results in total gross earnings of $1,218.75.

    1. Special thanks to Steven Van Alstine (CPM, CAE), Vice-President of Education, the Canadian Payroll Association, for assistance in summarizing Canadian payroll legislation and jurisdictions.

    Contributors and Attributions


    This page titled 4.1: Gross Earnings (Off to Work You Go) is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Jean-Paul Olivier via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.