How can the number of paychecks you get vary from year to year? Depending on the day of the week payroll comes around, an extra pay period will pop up once every nine to 11 years for those paid on a biweekly schedule, and every five or six years for employees paid weekly.
Great, you think, but not so fast. An irregular payroll year affects non-exempt, non-hourly salaries and the corresponding benefit values and payroll deductions such as tax payments and insurance deductions. An extra paycheck also influences benefits such as paid time off accruals, and 401(k) plans.
Because there is a lot on the line – for the employer as well as the employee — companies will take one of three approaches to the situation:
- H.R. may abandon the shorter payroll cycle in favor of a permanent monthly or semi-monthly cycle
This seems like a no-brainer but it actually is a severe course of action that could greatly impact a company’s cash flow. Most firms need a steady, smaller outlay for payroll to balance accounts receivables with accounts payables.
- Managers will budget for an extra payroll period and pay employees accordingly
Downside: Besides the budget inflation of an extra payroll across the board for salaried employees paid on that schedule, benefits will have to be reconfigured so that insurance payments, which are usually set to monthly premium costs, and matching 401-K payments are correctly accounted for. Usually, this results in a “premium free” extra check. Likewise, this may throw an employee into a higher tax bracket for one year.
- The company will pay less every week during the affected to maintain the correct annual salary level
A bi-weekly salary would be divided by 27 payments for that year, rather than by 26 weeks, and the payments and deductions would be based on that calculation. That sounds easy and fair to the company, but if employment offer letters included a set salary schedule (being paid x dollars every week or every two weeks), then that agreement must be honored. There’s also the morale factor: expecting employees to work for a smaller weekly or bi-weekly paycheck for a year due to the benefit of one extra paycheck isn’t usually received very well. And what would the repercussions be for the employee who might be terminated during the year: could they expect the difference in their earned salary to reflect the annual salary they had accepted, and demand back pay? And a final thought: if an employee has a garnishment or deduction built in for child support, expect pushback from recipients as payments are adjusted downward.
Realistically, the 27th or 53rd paycheck is best considered a predictable cost of doing business. For companies that can’t afford a monthly or semi-monthly schedule, paying an extra check may cost less, over time, than the adjustments and backlash of trying to level it out. (Shifting paydays also has a cost attached so that isn’t suggested, since the calendar year will catch up eventually.)
In the past, I’ve let the employees choose between option 2 or 3 because we offered profit-sharing, and they were all stakeholders in the bottom line. Likewise, if the company elects to offer the 27th check, remember to celebrate it as the perk it is. A management decision that positively impacts employees is a message that should be well communicated by human resources!