Choosing how often to pay your employees can be just as important for your business as choosing how much to pay them. While at first it seems like a simple decision, there are a number of factors that can impact employee morale, payroll processing costs and compliance with state and federal regulations. As you prepare for 2015 let’s take a closer look at your different options for paying your people.

Standard payroll periods

There are four standard options for choosing pay periods: weekly, bi-weekly, semi-monthly and monthly. Weekly and monthly are self-explanatory. Most companies choose either bi-weekly or semi-monthly pay periods so we will focus on these options. Monthly pay periods are usually discarded because of state regulations and lack of interest among potential employees. Weekly pay periods can be somewhat expensive to administer.

Bi-weekly payroll

With bi-weekly payroll employees are paid every other week on the same day. Since there are 52 weeks in a year this means that they receive 26 pay checks. Dividing 26 paychecks into 12 months doesn’t work evenly so companies add an additional paycheck twice during the year. For 2015 a hypothetical bi-weekly payroll could look like this (notice the extra payment in January and July):

Semi-monthly payroll

With semi-monthly payroll employees are paid twice per month on the same calendar dates. Usually companies choose the 15^th of the month and the last day of the month as the two cutoffs to mark the end of the payroll period. Because those dates could fall on any given day of the week adjustments need to be made. For example the first semi-monthly payroll for February 2015 would be due on February 15^th which falls on a Sunday. In these cases it’s usually the previous weekday when the payments are made. For 2015 a hypothetical semi-annual payroll could look like this:

Beyond the two surprise checks for bi-weekly versus the continually changing day of the week for semi-monthly what do you really need to consider when choosing a payroll period?

Overtime pay calculation and FLSA regulations

The Fair Labor Standards Act (FLSA) regulates many areas of employment. It requires that all nonexempt employees (usually the ones that are paid by the hour) receive at the very least the Federal minimum wage for the first 40 hours of work per work week. After that any additional hours worked for that work week must be paid at 1.5 times the hourly rate. The Department of Labor defines a work week as a “fixed and regularly recurring period of 168 hours.” It can start at any time during any day of the week but once it starts it keeps going until 168 hours are reached.

With a bi-weekly pay period, identifying a work week and calculating overtime is relatively easy. The period always ends on the same day of the week and the periods are always the same number of days.

This isn’t the case with a semi-monthly pay period which can end on different days of the week and consist of a different number of days. Pay periods and work week periods don’t always overlap perfectly. This complicates overtime pay calculations leading to confusion among workers while increasing the risk of mistakes in overtime pay calculations that could lead to disciplinary action by the Department of Labor.

State regulations

Most state governments require a minimum payment frequency for companies hiring people within their state. This requirement is more stringent than what the FLSA requires. While the FLSA permits monthly pay periods most states do not. Some states also have different minimum pay period requirements depending on the nature of the job and the industry.  The United States Department of Labor maintains a table of State payday requirements.

Payroll processing costs

Many payroll processing services charge clients a fee each time they process a payment. The less frequent the payments the lower your overall payroll processing costs will be.

Accounting

For virtually all companies a month is the standard unit of time used to record revenues and expenses and measure performance. From an accounting perspective, it’s much simpler to organize everything in terms of months. For that reason the semi-monthly pay period is easier to manage since there are exactly two per month.

With the 26 bi-weekly periods some labor costs will have to be accrued during the period the work was done but paid during the following period. This is more cumbersome especially when preparing performance reports and trying to compare costs from month to month.

This difference also exists when dealing with employee benefits. Deductions for benefits are done on a monthly basis, making them ideal for a semi-monthly payroll. With bi-weekly payroll adjustments need to be made throughout the year.

So which option is best?

As usual the answer depends. Companies with many hourly workers would be best served with a bi-weekly payroll. Handling overtime pay is simpler and employees like the predictability of knowing that their pay arrives on the same day of the week. Many also like the extra 2 payments per year that coincide with the 2 additional pay periods.

Companies without hourly workers could use the semi-monthly structure to keep the accounting simpler. Exempt employees (those earning a fixed salary) wouldn’t see much benefit from one system versus the other since they don’t qualify for overtime.

Another option would be to split the difference; keep hourly works on a bi-weekly payroll schedule and salaried employees on a semi-monthly schedule. Many larger companies do this and for some small businesses it could be the best of both worlds.

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