You Can Never Have Too Many Paydays…Can You??
Let’s face it. Payday is a highly anticipated day for any employee, no matter when it takes place. But how frequently your employees get paid and how many paydays there are per year also matters! After all, payroll frequency affects all kind of employee decisions, and it certainly affects lifestyle and cash flow.
From the employer perspective, the length of a business’ pay period is associated with its costs and cash flows. Processing payroll, mailing checks, and paying banking fees charged for direct deposits are all potential costs that may influence businesses to pay their workers less frequently. Beware, however, as most states set a minimum limit on how frequently employees are paid.
While every business has to decide which payroll schedule is best for it and its employees, it’s not actually a simple decision. There are several underlying things to consider, including employee preference, cost effectiveness, and FLSA (Fair Labor Standards Act) requirements. One of the most fundamental decision factors will be your State Law – that’s definitely a good place to start! Look for the minimum pay period that’s required –you can pay more frequently, but not less.
Now let’s dive into the differences between semi-monthly and bi-weekly, the two most popular payroll options.
Semi-monthly vs. bi-weekly payroll. At first blush, the differences between these cycles seem minor. After all, there are only two extra checks for bi-weekly (26) versus semi-monthly (24) per year. However, there are pros and cons to both pay strategies for both the employer and employee.
Most accountants run monthly reports, not weekly reports. That’s why your accounting department may prefer semi-monthly pay periods since the last paycheck each month coincides with the end of the month. For companies paying their employees bi-weekly, two months of the year will have three pay periods instead of two. Thus, your accountant must have payroll expense accruals so costs are recognized in the month the compensation was paid.
Employee benefits like medical, dental and vision care also typically run on a monthly basis, and many of your employees may have premium deductions to cover their healthcare. With semi-monthly payments, these deductions are easy. If you pay your employees bi-weekly, however, you will have to organize deductions based on the total number of annual pay periods (26 pay periods or even 27 in some years).
All of this seems to suggest that semi-monthly is better, but for hourly employees, bi-weekly may be the preference. Why? Because while salaried employees are usually exempt from collecting overtime (this is a topic for another day) hourly employees are not. Employees working overtime usually find it easier to confirm correct payment of their overtime hours on their paystub when they’re paid bi-weekly. This is because hourly employees may have inconsistent weekly work schedules, which may include overtime. For example, your employee may work 60 hours one week and 40 the next. With a bi-weekly pay schedule, overtime is easy to calculate but things get complicated when you consider whether your employees are paid “current” or in “arrears.” “Current” means the pay date is (almost always) the same as the pay period ending date. Because overtime might be worked after payroll is processed, for paid “current” schedules, overtime is paid in the following paycheck, but for paid in “arrears” schedules, overtime is paid after the pay period ends.
Companies on a semi-monthly plan typically pay their hourly employees for 86.67 hours per pay period (a little over two 40-hour weeks). In this case, when overtime hours are worked across two different semi-monthly pay periods, you will have to make adjustments and this can be even more confusing.
So what does all this mean? Most of our school clients process payroll and OT after the pay period ends so it is all paid in “arrears.” Employees prefer this method because everything is paid out at the same time making it much easier to track and manage.
The advantages to weekly payroll. Weekly payroll is not a popular option for most companies outside of specific industries like construction or plumbing. One of the most prohibitive reasons is cost. Most payroll vendors charge each time payroll is run. If you have dozens of employees on weekly schedules, those fees add up fast. The more payrolls you run also increases the likelihood of errors, which take time and possibly money to correct. Yet another stumbling block is that each time you run payroll it can take up a lot of time for your payroll administrator, especially if there are payroll accruals and overtime to audit.
That being said, weekly payroll may be a very attractive option for your employees! Just like hourly employees prefer bi-weekly pay periods, weekly payroll better matches an hourly employee’s cash flow needs. If an hourly employee has an irregular working schedule with overtime, weekly payroll will best reflect the compensation they’ve earned in “real-time.” For example, if your employee works 60 hours one week and 20 hours the next, weekly payroll gets the employee their overtime pay faster. And while weekly payroll can be cost prohibitive and time consuming for payroll administrators, even salaried employees may appreciate getting paid more often, so companies with a smaller staff might want to consider this option.
The bottom line is that setting up payroll functions for your school requires many decisions that will impact both you and your staff. Savvy administrators often decide to partner with a payroll provider to make this critical but thankless business task run smoothly and give them back the time they need to dedicate to running their businesses. But you might start by talking to your staff. See what they like, what they’d prefer, and hopefully, you can find the sweet spot between their ideal payday schedule and your capacity to provide it.
Little Bird HR offers payroll management and consulting services to help schools determine what payroll schedule is right for them. Got a question? Contact us on our website (littlebird.hr) to learn more.