The selection of a “pay frequency” by an employer is important and should “fit” your company objectives and comply with state law. New employers must adopt a pay frequency along with any “holdback period,” and existing employers may wish to change their pay frequencies for various reasons. This article explains the primary items to consider to adopt the pay frequency which best fits your organization.
STATE LAWS REGARDING MINIMUM PAY FREQUENCIES
The starting point in selecting the pay frequency which best matches your organization is to review the state “minimum pay frequency” laws of the states in which you have employees. No federal law requires a specific pay frequency but virtually all state labor departments have minimum pay frequencies. The state minimum pay frequencies may vary between your salaried/exempt employees and your hourly employees. Some states permit a monthly pay frequency, many do not. So the starting point in selecting a pay frequency is to check the laws in your state regarding pay frequency and any state laws pertaining to the maximum time between the last day of your pay period and your selected pay date. The US DOL provides a general overview of each state’s payday requirements on its website, but check your state’s own department of labor website for more specific information. (Note for Indiana employers: a monthly frequency is allowed, but only for salaried employees.)
TYPES OF PAY FREQUENCIES
The common pay frequencies are weekly, bi-weekly (26 pays per year), semi-monthly (24 pays per year) and monthly. The most common pay frequency, per labor department studies, is bi-weekly, with weekly being second, semi-monthly third and monthly being the least common pay frequency. A small number of employers have adopted a daily pay schedule due to the difficulty in finding workers, but daily pay is not yet common.
TIME AND COSTS INVOLVED IN PAY FREQUENCIES
The more frequently you pay employees, the more time and cost will be involved. It takes time to process a weekly payroll and many payroll companies charge more for weekly pay than a less frequent pay schedule. Weekly pay requires weekly garnishment/child support work, weekly time gathering for your hourly employees and weekly deduction calculations for insurance/fringe benefits, which are often calculated on a monthly basis.
OVERTIME CALCULATION COMPLEXITIES
If you have several non-exempt hourly employees, you must monitor time and pay overtime premiums based on a 40 week work schedule. Overtime calculations are rather easy to make for weekly and bi-weekly pay frequencies, but far more complex for those employers who pay semi-monthly or monthly. Employers with several hourly employees who work over 40 hours per week often choose weekly or bi-weekly pay frequencies for hourly staff, and may select a semi-monthly or monthly pay frequency for salaried/exempt employees.
EMPLOYEE PREFERENCES
Employees generally prefer frequent pay and a pay frequency which is consistent and easy for them to budget for. Many industries will pay employees weekly (construction, restaurants, etc) in order to attract and retain employees. A semi-monthly pay frequency will make payday vary from one payroll to the next, as opposed to “every Friday” or “every Wednesday”—-Employees like to know when their payday is, which is often a negative for employees who are paid on a semi-monthly basis. A bi-weekly pay schedule means that employees receive 3 checks during 2 months of each year, which many employees like since they learn to live off their “regular” paycheck and the “3rd paycheck” of 2 months per year is viewed similarly to a bonus pay—-vacation, major expense, etc. It is very important that your pay frequency is consistent with employee preferences in your industry and what your competitors are using as pay frequencies.
MONTHLY DEDUCTIONS FOR INSURANCE, HSA’S, ETC
Many employee deductions for their share of fringe benefits are calculated/presented as monthly amounts, which is consistent with semi-monthly or monthly pay frequencies. Weekly or bi-weekly pay frequencies will require “translating” these monthly amounts to withhold from employees on a weekly or bi-weekly basis. In addition, employers will need to determine what to withhold, if any, on the “extra checks” generated from weekly pay frequencies (5 paydays 4 months each year) or bi-weekly pay (extra paydays 2 months each year). I do not view this factor as all that important in your selection of a pay frequency, but it is a factor your “payroll department” will need to manage.
FINANCIAL ACCOUNTING
Your finance/accounting department is apt to like semi-monthy or even monthly pay frequencies since those pay frequencies contain exactly one month of labor costs in every monthly financial/P&L. Weekly and bi-weekly pay frequencies will require the accounting department to “accrue” earned but unpaid labor costs at the end of each month, BUT that is “accounting 101” in our opinion, and generally is a consideration, but of lesser importance than most of the others noted above.
IF YOU CHOOSE TO CHANGE YOUR PAY FREQUENCY
Changing your pay frequency will require careful analysis and excellent communication with your existing employees (and payroll provider!). We believe any change in pay frequency should be planned and communicated well in advance. Many employers do not change a pay frequency until the beginning of a new calendar year.
CONTACT YOUR PAYROLL SPECIALIST IF ANY QUESTIONS ABOUT YOUR PAY FREQUENCY
AccuPay’s payroll specialists are continual learners and have “seen” the consequences of all of the above pay frequencies, as they interact with their clients. If you have any questions about your pay frequency or a possible change in it, contact your dedicated payroll specialist at 317-885-7600 or payroll@accupay.com.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.
