Productive and non-productive payroll earnings

Payroll systems use different paycodes 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

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. 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 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 in to 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.

Using Worked Hours in a Productivity System

It is important for a business to keep track of employee hours correctly when managing worked time. Treating productive time incorrect can result in bad data leading to poor decision making.

Productive Time for Salaried Workers

Company finance departments will generally classify any hours worked doing the company business as productive time. For a salaried worker, any time spent in the office, or out of the office, doing company work, such as outside sales, would be productive.

Generally productive hours for salaried workers are limited to the assigned work week. If a salaried worker (also known as exempt, as in exempt from overtime) works more than his assigned hours, the normal hours are counted as productive, and the extra hours are not usually counted.

For example, Mary is a manager who does not earn overtime. Her normal schedule is 40 hours a week. Last week she worked 50 hours due to an important project. For productivity for her department, she is considered to have worked 40 hours. As a manager, she is may not be required to track her excess time, since she is not paid overtime for it.

Productive Time for Hourly Workers

For hourly workers, any time performing company business is also treated as productive. Hourly workers also are paid for overtime, that is, hours that are worked over limits specified by government regulation.

In the United States, many state laws require hourly workers to be paid overtime for worked hours in excess of 40 hours per week, or in some cases eight hours per day. Often, non-worked hours, even if paid, do not count as worked hours and do not result in overtime.

Overtime can be paid at a rate that is one and half times the base hourly rate, or may be higher if that is the company’s policy or as part of a union contract. The company may agree to pay some hours at a higher rate, for difficult to fill shifts.

Even if overtime is paid at a higher rate, for accounting and productivity purposes, each overtime hour is counted as only one hour. When examining productivity, the amount of money that is paid for the time is not important, only the amount of time worked.

Using Productive Time in a Productivity System

The reason that determining the proper amount of productive time is important relates to the use of a productivity measurement system. In a simple system, the amount of output is divided by the amount of hours worked to determine how productive the process is.

For example, if ABC Company makes 5,000 widgets in January, and if it takes them 500 worked hours, this computes to an average of 10 widgets per hour, or put another way, 0.1 hours per widget.

This measurement can be compared to prior months to determine if January was a productive month. If not, management may need to take steps to improve the process. The data can also be benchmarked against other companies, if comparable data is available.