Employers have a lot of control over the decision of how much to pay their employees, but federal and state labor laws also must be followed. Be sure you understand these laws before you start hiring employees.

The most widely known labor law is the minimum wage law. As of July 24, 2009, the minimum wage is $7.25 per hour. This rate must be paid to all nonexempt employees for each hour worked up to and including 40 hours in a calendar workweek. Any time beyond 40 hours must be paid as time-and-a-half overtime, which works out to a current minimum of $10.875 per hour. While this is a federal law, some states have minimum wage rates that are higher, so be sure to check with your state about required wage rates.

Keep in mind that the $7.25 minimum wage is a wage that large employers pay. A large employer is any employer with a gross sales volume over $500,000 per year. This law also applies to employees of smaller firms if the employees are engaged in interstate commerce or in the production of goods for commerce, such as employees who work in transportation or communications or who regularly use the mail or telephone for interstate communications. Other types of jobs that fall under this law include guards, janitors, and maintenance employees who perform duties which are closely related and directly essential to such interstate activities. For more information on the minimum wage laws, you can visit the U.S. Department of Labor website (www.dol.gov/whd/minimumwage.htm).

In addition, an employer can pay new employees who are under the age of 20 a training wage of $4.25 during their first 90 days. You cannot displace permanent or current employees with new employees using the training wage.

The following is a list of employee types.

Many companies use either a time clock or time sheets to track the number of hours an employee works. Managers usually review these hourly reports, approve them, and send them to the accounting department. Accounting then calculates the wages or salary due and prepares the payroll.

Calculating pay for hourly employees is relatively simple. If you pay weekly and the employee works 40 hours, then multiply the number of hours by the employee’s hourly wage. If the employee works over 40 hours, multiply the hours over 40 by the hourly wage times 1.5. The following calculation is for an employee who earns $10 per hour and worked 45 hours:

If your normal pay period is once every two weeks, then the calculation is based on 80 hours, but you still determine whether the employee is eligible for overtime based on a 40-hour week. So an employee who works 45 hours one week and 35 hours the next, would still get 5 hours of overtime for the week that he or she worked 45 hours. To figure out that employee’s pay, you would use the following calculation.

Things get a bit more confusing when you are figuring the gross pay for a salaried person who is paid a monthly salary but is also eligible for overtime pay. Assume the employee earns $3,000 per month and is paid twice per month at $1,500 per pay period. In order to calculate overtime for this person, you would need to calculate an hourly wage. There are 2,080 work hours in a year (40 hours per week multiplied by 52 weeks). A person earning $3,000 per month would have a yearly salary of $36,000 and an hourly wage of $17.31 ($36,000 divided by 2,080).

After you know the hourly wage, you can calculate overtime by multiplying that wage by 1.5, which in this case equals $25.96. Whenever that employee works more than 40 hours in a week, you would multiply the number of overtime hours worked by $25.96. For example, if the salaried employee is entitled to overtime of 5 hours, the bimonthly check is figured as follows.

You also may have some people who are paid on a commission basis. They can either be paid on a straight commission basis or paid a salary plus commission. Things can get even more confusing if the salary is an advance on commissions. Let’s look at how you would calculate the check under all three scenarios for a salesperson who sold $50,000 of products during the month.

First, calculate the check by a straight commission of 10 percent.

Next, calculate the check for a salesperson with a salary of $2,500 plus 5 percent commission.

You can see that the check amount is the same. The big difference for the employee is having a set salary to count on even if he or she has a slow sales month. Although the salesperson on straight commission has a higher earning potential at a 10 percent commission rate, the salaried salesperson has a greater level of security.

You need to decide what works better for your business and the type of salespeople you want to hire. Salespeople on straight commission do tend to be more aggressive, but they may or may not service your customers the way you want them serviced. You can have more control of a salesperson’s activities if you pay a salary.

A third way to reward salespeople is to give them an advance on commissions to guarantee them a monthly income they can count on, but still pay based on straight commission. For a salesperson who sold $50,000 at 10 percent commission, but gets a monthly advance of $2,500 paid on the first of the month, the calculation would be as follows:

If the employee doesn’t meet his or her monthly advance, the negative is usually carried forward to the next month. Some companies require employees to repay the advance; others allow the negative to build up over a number of months. Salespeople who regularly do not earn their advance are usually quickly let go and sometimes left with a sizeable debt to be paid based on the advances.

Your company also may give salespeople an incentive to earn more each month with what is called a graduated commission schedule. For example, suppose the straight commission salesperson earns 5 percent on the first $10,000 in sales, 7 percent on the next $15,000, and 10 percent on all sales over $25,000. You would figure that salesperson’s commissions with a $50,000 sales volume by using this calculation:

You adjust a salesperson’s gross wages by any refunds, returns, or allowances. You not only need to keep track of a salesperson’s initial sales, but also any changes to those sales made later in the month.

If you are running the type of business where tips are common, you need to keep records of the tips. If your company considers tips as part of total compensation to meet minimum wage obligations (such as waitresses in a restaurant), you must carefully maintain records of these tips to prove you are meeting minimum wage standards. As the employer you need to calculate an employee’s gross taxable wages using both the employee’s hourly wage plus tips reported. Here’s an example of how you would calculate gross wages for an employee earning $4 per hour plus $200 in tips for the week.

The check you write to the employee is calculated on the base wages minus any taxes or benefits. You can pay employees less than minimum wage as their base wage provided that tips increase their earnings above the minimum wage.

So far, we’ve been talking only about gross pay. As we are all painfully aware, our paychecks are much lower than our gross pay. The check we receive is gross pay minus all deductions, whether for taxes, benefits, or retirement savings. The next two chapters look at reductions to paychecks and how they work. Chapter 13 reviews payroll taxes, and Chapter 14 looks at benefits.