There is a phenomenon that can occur about once every 5 to 11 years, depending upon whether you pay your employees weekly or biweekly. It is that instance of an extra pay day within the calendar year. For many companies, we find that it passes without a second thought, but should it?
First off, why does it happen? The root of the problem is that 365 days in the year is not divisible by a 7 day work week. There is a remainder, and over time, that remainder will add up to a whole number, thus another pay period. 365 days in the year, divided by 7 days (weekly pay period) is equal to 52.142857 weeks. Don’t forget leap year, where every four years there are 52.285714 weeks in the year. Six years with one leap year in between, and that remainder adds up to one, and your 53rd pay period in the year.
What is the effect? For a company that has hourly paid employees, there is none. Hourly employees are paid a rate of pay for their hours worked. Each week stands on its’ own, and there is no concern. Ah, but what about deductions such as a health insurance premium? There is the first concern. I have always been the proponent to take a monthly deduction amount and divide it by 2 as I pay biweekly. Then in those two cases each year when there are three pay periods in the month, I block that third deduction. Employees are happy as it is like an extra bonus month. Although if you are like the majority, and take that monthly premium and multiply it by 12 (for each month), then divide by 26 (number of pay periods in a year), then you will, in fact, over collect in years there are 27 pay periods. You may not even know when it occurs, but you are over-withholding from your employees. The right thing to do would be to block deductions calculated by this method on that 27th pay period in the year. Not an easy task as no payroll system can automate this occurrence.
For companies that have salaried employees, here is where the biggest concern is. If you have a salaried employee who is to receive $52,000 per year, I will say that you take that salary amount and divide it by 26 (for a biweekly payroll frequency), and come up with $2,000 per week. For those years with 26 pay periods, his W-2 will reflect $52,000, but in the year with 27 pay periods, they will earn $54,000. This is where the panic starts, and the question becomes why the employee was overpaid. As the employer, you can either accept this, or here are some other options.
- Don’t pay the employee for the 27th pay period, although I don’t think this will go over well.
- Identify that there will be an extra pay period at the start of the year. Then, for that year, divide their salary by 27. Maybe not a bad option, but it could be a hard sell to the employee as to why they are receiving a 3.7% decrease in their regular pay period salary.
- When you figure salary amounts from the start, divide them by 26.07692 rather than 26. This way if you look at the annual salary over the course of eleven years, it will average $52,000 per year, although their W-2 will never equal $52,000, and it is only fair to employees who work greater than 11 years.
- Don’t refer to their salaries in the form of annual amounts.
- Pay salaried employees on a semi-monthly basis. There is nothing to convert, and would appear to be the most fair way to both employees and the employer. This is also the easiest for budgeting and financial reporting. The word of caution with semi-monthly payrolls is dealing with overtime on the hourly employees, but a good automated time & attendance system will take care of that.
In all cases, the key is preparation. Planning and knowing this is going to happen at before the start of one of these odd years will provide you with more options. A word of caution, if your check date falls on a Thursday, then 2015 may be your year.