Payroll systems use different pay codes so that hours are classified differently based on how salaries are earned or paid. The reason to identify the type of hours paid in payroll is three-fold:
- to pay hours at a different rate,
- to keep time used against a paid time off bank, or
- to track time for a productivity system
Productive Hours for Accounting Purposes
The time that is worked is tracked as productive time, that is when work is produced by employees as a normal course of their job. This can be broken down in separate categories based on the pay rate that is assigned to the employee.
The most common pay code is for regular hours, which also could be called normal or standard hours. According to TempCFO Accounting, a person who is assigned a 40 hour work week that shows up, punches in on time and leaves at the normal end of his shift is likely working regular time.
Overtime is a legal term for hours worked in excess of the normal work day or week. Depending on the law in effect, overtime might be for time worked over eight hours in a day, or alternatively, over 40 hours worked in a week. Overtime is usually paid at a higher rate, so hours are captured in a different pay code to distinguish them. If time is paid at different overtime rates, different pay codes are used. Employees that qualify as exempt, or salaried, generally are not paid for overtime.
Nonproductive Hours in a Payroll System
Hours that are paid but do not result in the production of work are tracked as nonproductive. In many cases, these hours are paid as a benefit to the employee.
- Paid vacation may be provided to the employee. The time off needs to be tracked in payroll so that the employee does not exceed the allowed maximum provided. The term “vacation” is used in the United States and may be referred to as “holiday” in other countries.
- Holiday time, in the US, refers to a specific day that many employees do not work, such as Christmas or Independence Day. This may be tracked separately from vacation so that it is not deducted from the vacation bank.
- Sick time off may be allowed for an employee whose illness prevents him from working. Company policy will determine if the time is paid or not, but the payroll system should track the time. A different pay code should be used for unpaid sick time off, in order to track the time even if a benefit is not provided.
- Some companies combine all three categories (Vacation, Holiday and Sick Time) as well as Personal Time Off in one, with the name PTO, for Paid Time Off. In this situation, only one code may be needed, although there may be a desire to collect unpaid time off.
Other Nonproductive Categories of Paid Time
Bereavement, or funeral leave, is often paid time off that is not counted as productive, and generally is not deducted from vacation or PTO banks. Like paid time off for jury duty, it is not discretionary by the employee.
On-call hours are different from other categories in that they are paid at a different rate (usually lower) than other time. Companies will pay employees a nominal rate to be available to work if necessary, that is, ready if they are called into work. Employees that are called in may be paid at another rate, sometimes called call back pay.
On-call hours are paid, but usually not counted as either productive or non-productive time, since they are paid at a lower rate.