Managing Extra Pay Periods Caused by the Calendar
Author: Rena Pirsos, Brightmine Legal Editor
HR and Payroll departments play a crucial role in forecasting and managing extra pay periods caused by the calendar. While they are a natural occurrence, failure to plan for them can lead to a surprising increase in payroll costs. Early preparation is essential to manage the financial impact and ensure smooth operations for all stakeholders.
Why It Happens
Extra pay periods generally occur because a calendar year and an employer's pay periods do not always coincide precisely. In every calendar year of 365 days, at least one day of the week occurs 53 times (i.e., 52 weeks x 7 days/week = 364 days). In leap years, which have 366 days, two days of the week will occur 53 times. And about every 10 years a rare 53rd week or extra 27th pay period for biweekly and weekly pay schedules occurs regardless of whether it is a leap year.
The potential payroll impact of an extra pay period depends largely on the pay frequency used and whether employees are classified as exempt or nonexempt. And the exact year in which an extra pay period falls depends on the day an employer designates as payday.
But there are ways to effectively plan for and manage these situations to prevent any unexpected wage expense.
Weekly and Biweekly Paydays
An employer that pays employees on a weekly basis will have an extra pay period every five or six years. An employer that pays employees on a biweekly basis will have an extra pay period about every 10 or 11 years.
Other than holidays or other factors that can shift payday, payroll run weekly or biweekly is always paid on the same day of the week. If an employer's processing schedule is weekly and the selected payday of the week happens to occur 53 times, an extra payday must be accounted for.
If an employer pays biweekly, whether the extra payday occurs will depend on when paydays fall in late December and early January. If there are only 26 payrolls each in both the year that is ending and the ensuing year, there is no cause for concern. However, if one of the two years has 27 paydays, how the pay is handled for that year may have to be adjusted.
Semimonthly Paydays
Semimonthly paydays, which typically fall on the same two dates of every month, often must be pushed forward or backward when the normal payday falls on a holiday or weekend.
For example, if paydays are on the 15th and last day of the month and December 31st falls on a Saturday when direct deposits are not typically posted, the proactive thing to do is push the payday back to an earlier day before the 31st, rather than forward (e.g., to January 2). There are two main reasons:
- A shift forward results in 23 total paydays in the year that is ending and 25 in the ensuing year - employees may think they were paid less than they were due in the year ending.
- The time window from the end of the pay period to payday is extended, which may violate state lag time requirements.
Also, when payday is pushed back and employees are paid earlier than usual state law is not violated, employees are unlikely to complain about receiving their money a little sooner, and any concern about the year having a different number of paydays is resolved.
Note, however, that if payday is pushed back, direct deposit information must be transmitted by the originating bank no later than three full business days (72 hours) before so that the funds will post to employees' accounts in time. Keep in mind that weekends and holidays are not days that count towards the 72-hour window.
Exempt vs Nonexempt Employees
When there is an extra payday in a year, exempt employees' pay can be spread out to reflect 53 equal installments in the year rather than 52.
However, use extreme caution when adjusting salaries for nonexempt employees because their pay structure can be based on several components, such as commissions, piecework, hours worked, etc. Nonexempt employees can even be paid a flat salary from payroll to payroll so long as they stay under 40 hours in the workweek and do not incur overtime. However, it is improper to reduce earnings for verifiably completed piecework, hours worked, overtime or any other pay item that is linked to work performed or hours worked.
Hourly employees must be paid consistently with the hours worked within the workweek. When payday falls on the calendar is not relevant and should not affect hourly employees' pay.
Key Takeaways
By proactively planning for calendar anomalies and understanding how they affect different employee groups, HR and Payroll can smoothly manage extra pay periods while ensuring compliance with wage payment laws. Consider the following general action steps:
- Assess your workforce composition - the mix of exempt vs. nonexempt employees.
- Establish clear adjustment policies before the new year begins and try to avoid mid-year changes.
- Maintain consistency among similarly classified employees when adjusting payrolls.
For more in depth, step-by-step guidance and practical examples, see How to Handle Extra Pay Periods Caused by the Calendar.