Another Headache for HR in 2009: Twenty-Seven Bi-Weekly Paydays
As if HR didn't have enough on its plate with E-Verify compliance, new FMLA regs, and EFCA planning, next year is one of those strange years with 27 bi-weekly paydays instead of 26. Bi-weekly pay programs pay employees in 14-day increments resulting in a 364 day annual pay cycle. Since there are either 365 or 366 days in a year, every 5 years or so, there is a calendar year with 27 pay periods instead of the typical 26.
The 27 pay periods for 2009 create a compensation issue for salaried employees. Bi-weekly pay is typically calculated by dividing annual salary by 26 and employees are accustomed to a payroll amount based on this division. Continuing this practice in 2009 will result in an "extra" paycheck in 2009, but the normal 26 pay periods will resume in 2010. Some commentators have characterized this as a "timing issue". It is not. There are never years with only 25 pay periods to offset the years with 27.
Employers approach this situation in two ways. Some employers adjust salaried employee bi-weekly compensation for the 27 pay period years by dividing the stated annual salary by 27 rather than 26 resulting in a lower pay for each pay period in the year. Salaried employees are paid the same gross salary in smaller increments. However, this approach can cause problems with automatic deductions. Other employers allow the extra pay check and inflated compensation, not wanting to mess with the largely automated payroll system. Both approaches will require employee communication and may be influenced by an employer's past practice. Legal issues can arise from reducing the bi-weekly salary amount.
Paying salaried employees on a semi-monthly basis (twice a month) avoids this problem because there are always 24 paydays. However, semi-monthly pay doesn't always work well for hourly employees because it may require estimating hours and overtime based on misalignment of the 7-day workweek with the 15 or 16-day pay period. Many employers don't want the expense of running two payrolls so they live with the 27 payday problem.
Great post today.
With all due respect I think you are incorrect. On a cash basis you are correct that with 27 pay periods you will end up with higher annual salary. However, that 1st pay check is actually for hours worked in 2008. This is evident if you take an employee who is hired on Jan1/09 and has their last day on Dec31/09 and makes $52,000/year. Use this information in your 27 pay period model and you will find that you are short paying them about 3.5%.
My admittedly simple mind looks a the situation this way: Almost all individual tax payers are on a cash basis, so their W-2 forms reflect the compensation received during the calendar year(whether or not attributable to prior or subsequent periods). In 2008, an employee with a $50,000 annual salary will receive 26 bi-weekly paychecks with a gross amount of $1923.08. However, if an employer carries over the same gross paycheck amount ($1923.08) for 2009, the employee will receive 27 paychecks for a total salary of $51,923.16. An employer needs to adjust the bi-weekly paycheck to $1851.86 to reflect the additional paycheck to keep the employee's salary at $50,000. I may be missing something in the analysis and will welcome further enlightenment.
As far as our internal accounting of payroll, there will be 26 payrolls per year in 2008, 2009 and 2010.
W2's pick up payroll information based on paydates.
As far as W2's are concerned, we will report 26 payrolls in 2008, 27 payrolls in 2009 (because,for us, the last paydate of the year is 1/1/2010 so we'll have to move it up to 12/31/2009 bringing our '09 total to 27), and 25 payrolls in 2010.
So, our 50k sample employee will show earnings of
2008 - 50,000.08
2009 - 51,923.08
2010 - 48,077.00
When the employee shows up at my door on 1/31/2011 complaining that we shorted his/her pay for 2010, I'll ask him to review his/her 2009 W2.
My company is falling into this quandary. Basically to me it boils down to this....ANY 26 consecutive pay periods should be equal to your annual salary regardless of when they occur.
26 pay periods is equal to 364 days.
My company will have us working from Dec. 13, 2008 - Dec. 25, 2009, or a total of 377 for our annual salary.
To me that is clearly wrong. You cannot confine the annual salary to the calendar year and then have pay periods that do not match that same calendar year.
Also, the final pay period should be Friday Jan. 1, 2010 and not Thursday, Dec. 31 2009. This would fix the entire 27 vs. 26 problem.
Total and utter nonsense - there is no headache, you are thinking too much and are confusing yourself. No adjustment is required because the bulk of the payment in the first paycheck actually relates to the last 12 days of 2008. Are you cutting another paycheck for the period Dec 19 - Dec 31, 2008? You are confusing timing with accrual. Payroll expense is incurred as and when people work, not when they are paid. Your accounting department should have accrued the last 12 days of pay in the P&L for 2008. Employees should continue to get paid on the regular basis, ie 14/365 * annual salary, which is roughly the same as dividing by 26. Yes, you can choose to pay them for one day less as 14*26=364 and not 365. Consider the extreme case of an employee who joins on Dec 20, 2008. According to your crazy logic the poor guy will not get paid for anything in 2008 as all payments in 2009 will only relate to 2009.
Fire up Excel and do the math
The accounting issue of whether the company accrues the pay in one year or the other is immaterial to the employee. The employee is impacted by the timing of the paychecks and the resulting tax reporting and payroll deductions for an additional pay check. The issue for me comes down to how pay is reported on W-2 forms that may be used to calculate pension contributions, salary reductions for flex benefits, bonuses, etc.
With an extra payroll in 2009 are an employee's tax reporting and deductions being appropriately managed? If an employer uses an accrual method for tax reporting, than there is no issue. The employee's W-2 will report a level salary regardless of the timing of the payroll. If the W-2 accounts for all salary paid to the employee in 2009 on a cash basis, it will overstate the annual compensation so that an employee will have a greater 401k match and larger amount of any benefit that is based on a percentage of pay. The impact on one employee may not be great, but across a large employer it could throw budgets out of whack. In addition, the extra payroll may result in an additional withholding of any payroll deducted sum like medical contribution, life insurance, flex benefits, dependant care, etc.
For example, if W-2 forms report a consistent salary of $50,000, then pension contributions and other benefits based on W-2 reported earnings are unaffected. If the W-2 earnings fluctuate as a result of pay period timing, the benefit amounts will also fluctuate. As to the extra pay period, if an employee elects $2500 in flex benefits the amount deducted from each paycheck is overstated if there are more paychecks.
From an employee's and the w-2 standpoint, regardless of when the money was earned, it is accounted for in the year received.
In terms of bi-weekly pay, there is never a year in which there is only 25 pays. A year is 52 weeks, plus one day (2 in a leap year). Therefore, approximately every 5 years there is a 27th pay. This is not a timing error that is corrected by a 25 pay week.
This creates the headache on the employee's end. I know firsthand. I pay child support deducted directly out of paycheck. The calculation takes the monthly amount, multiplies by 12, and divides that amount by 26. Therefore, once this amount has been withheld 26 times, my child support is paid in full. This happened in 2004, and on the 27th pay, there was no deduction, and there was also no support due, the order had been met and fully satisfied for that year.
This year, due to the holiday, the pay that we would have received on 1/1/09, was moved up a day, resulting in 27 pays for 2008. I'm with a different company than I was in 2004, and they deducted the amount again, despite the fact that I had fully paid the amount due for the year. I brought this to the attention of my payroll department, and there basic response was that everything was automated and there was no way for them to correct the error. I wasn't exactly happy with this response. I actually have to contact the state and file a "Request for Collection of Child Support Overpayment". Something, that as an employee with automated deductions, I should not have to do. This is where the headache comes in.