Deciding when to pay your employees isn’t always straightforward. In this post, we’ll cover everything you need to know about choosing a pay period. This information includes laws and regulations surrounding when to pay employees. I also offer helpful short-term and long-term tips to help you pick a pay period.
Why Choosing a Pay Period Is So Important
Payroll can be a stressful time for any company, more so small businesses. Often, the payroll department is scrambling to hit the payment deadline. Unfortunately, these departments regularly work under tight and stressful schedules, mainly because monthly payroll processing data doesn’t arrive on time. Whatever the case, it’s important to choose and stick to a structured pay period.
For one, choosing a pay schedule ensures that you are compliant with federal and state wage laws. Generally speaking, federal law mandates that businesses must pay employees on their regular payday. However, the Fair Labor Standards Act (FLSA) doesn’t specify the frequency of paydays. Therefore, this job is left to states under their payday frequency laws.
Each state has laws and policies about how often employees should get paid. For example, some states mandate weekly or bi-weekly payments. Businesses that want more extended pay periods, in this case, would have to get approval from the state’s labor commission.
Employees can file a claim for missed or late payments. This could lead to several consequences, including forfeiting your business license, steep fines and penalties, and expensive lawsuits. Sticking to your state’s pay period helps protect your business from unnecessary litigation.
Additionally, money is a significant motivator for employees. Naturally, prospective employees prioritize wages and benefits when deciding to accept a job offer. Many employees also consider pay frequency, especially for lower-wage positions. So, having an attractive pay period can help you lure top talent. For example, most organizations run payroll biweekly. Choosing a monthly schedule may alienate your business, causing you to lose potential employees to your competition.
Finally, a reasonable pay schedule also ensures your employees get paid on time. To achieve this, you will need to choose a pay period that works for your organization and its cash flow. In turn, you are more likely to retain your top performers if they can count on receiving their paycheck on time, every time.
Streamline Your Payroll Process
It’s worth investing in payroll software to help you streamline your payroll process. I highly recommend Gusto, an online payroll service that fits all kinds of businesses. The best part about Gusto is its unlimited payroll runs. So you can process payroll as many times as you wish and not have to pay extra.
Additionally, Gusto files your tax forms on your behalf every time you process payroll. While its competitors charge an extra fee for tax filing, Gusto includes this service with its base price.
Gusto offers six different pay periods that are easy to set up. It’s very flexible, and you are allowed to run payroll an unlimited number of times. You also get a slew of HR features, including an employee self-service portal, benefits administration, and onboarding tools.
Gusto’s pricing starts at $40 per month plus $6 per month per employee with its Simple plan.
Types of Pay Periods
If you’re just deciding on your ideal pay period, it’s a good idea to consider all the options before proceeding.
The ideal pay period favors both the organizations and the employees. In this case, the organization can process payroll efficiently while the employees are happy about how often they receive their paychecks. To this end, there is specific information for you to consider and apply to bolster the effectiveness of your chosen payment period.
Weekly Pay Periods
A weekly pay period typically consists of a 40-hour workweek. Here, employees are paid every week. Many hourly employees prefer this option. The more frequent paychecks help with budgeting and cash flow.
In most cases, payday falls on Friday. This will typically be four to five days after the close of the pay period. This gap offers your payroll specialist enough time to gather payroll data and process the checks.
Using the weekly pay period means you have 52 payroll cycles in a year. There will be an extra pay period in a leap year, totaling 53 payroll cycles for that year. On the downside, weekly pay periods bring up the cost of processing payroll. Additionally, the payroll department will spend more time processing checks that could be used on other crucial business tasks. The weekly pay period is also the hardest to handle if you are working on your own.
Another disadvantage of a weekly payroll is its complexity. Pay periods may often extend into the next month. This makes it harder to report monthly accrual expenses. The payroll process can also be more complicated and prone to errors, given the additional calculations.
According to the U.S. Bureau of Labor Statistics, 33.3% of businesses use the weekly pay period. Industries that most often use this pay cycle include construction, manufacturing, trade, transportation, and utilities.
Bi-Weekly Pay Periods
The biweekly option is the most common of all pay periods. This means employees get paid every other week. This pay cycle will usually have 80 work hours for a full-time employee. For the most part, this pay period will have 26 paychecks in the year. Some years may have an extra paycheck since the year doesn’t divide cleanly into seven-day weeks.
Many employees prefer this option because of the regular paychecks. There is also sufficient time to review timecards and complete the payroll by payday. Again, payday tends to fall on a Friday. This means the payroll specialist has four to five days after the close of the pay period to complete the process.
On the downside, bi-weekly pay periods can be expensive. It may not be as expensive as the weekly option, but the pay cycles are frequent enough to drive up the cost of processing payroll. Also, just like with weekly pay cycles, pay periods can extend into the next month. This makes reporting and calculations more complicated.
Approximately 40% of companies prefer this pay period. Common industries with biweekly pay periods include mining and logging, information, professional and business services, education and health services, and leisure and hospitality.
Semi-Monthly Pay Periods
With a semi-monthly pay period, employees get paid on the same date, two times a month. This means that there will always be 24 paychecks in a year. Each pay period will have approximately 86 hours. Most businesses using this model have the first pay period from the 1st to the 15th and the second from the 16th to the last day of the month.
Just like biweekly payments, this pay period offers employees regular paychecks. Additionally, employees know exactly when they will be paid. However, you will need to decide what happens if the pay date falls on a weekend. Usually, employers will pay their staff on the Friday before the weekend in this case.
Finally, processing payroll is more straightforward since the hours worked tend to stay the same month after month. On the downside, semi-monthly payments can make scheduling difficult. This is because the pay period won’t always end on the same day of the week.
Roughly 19% of businesses follow a semi-monthly pay period. Semi-monthly pay periods are relatively common in the mining and logging, and financial services industries.
Monthly Pay Periods
The monthly pay period means employees get paid once a month. This is the least popular pay period, with 4.7% of organizations using this model. This pay period means there will be 12 paychecks in a year.
The main advantage of a monthly pay period is its cost. Payroll processing will be cheaper since there is only one pay period each month. Many contract employees and freelancers also prefer to invoice once a month. Reporting accrual expenses is also easier since the hours worked remain the same every month.
On the downside, many employees don’t like this pay cycle since they only receive their paycheck once a month. It is up to the employer to determine when to pay their employees. Additionally, scheduling payroll can be a challenge since the pay period ends on a different day of the week each month.
Strategies for Choosing an Effective Pay Period
Some strategies will take a longer time to materialize. For example, it may even take a few years of experience before you can choose the optimal pay period for your business. But others take less time. Here are a few tips and strategies to guide you in the right direction.
Get Familiar With Your State’s Employment Laws
Just because a pay period is convenient doesn’t mean you should use it. Federal law doesn’t dictate which pay frequency you should choose. But each state has its unique payday frequency laws. So you should refer to your state’s department of labor for details on pay regulations.
For example, employers in Nebraska have free reign to choose the pay frequency they want. As long as you pay employees every month, you are free to select your preferred payment period. Minnesota is equally lax, as long as you pay employees at least once every 31 days.
But in Maine, you must process payroll at least once every 16 days. This requirement rules out monthly payments. Connecticut has even more stringent pay frequency laws and regulations. There, employers must pay their employees weekly. So you’ll need to get an exemption from the labor commission if you intend to pay employees less frequently.
Also, remember that you will have to stick with the pay period you choose. You may be able to change it in the future, but you’ll need to go through hurdles to make that happen.
Consult Your Employees
Ideally, the pay period should favor both the employer and the employee. You may want to consult with your employees about the ideal pay schedule. Generally speaking, employees prefer to be paid more often. This preference is prevalent in the trades and service industries.
On the other hand, C-suite executives and managers may be okay with monthly paychecks. You can also get inspiration from how other businesses in your industry pay their employees.
Consider Your Payment Method
Your payment method also influences the ideal pay period for your business. For example, weekly payroll may not be a good idea if you pay your employees via check. You’ll have to spend a lot of time writing checks. Additionally, employees will spend more time at the bank depositing the checks.
Conversely, direct deposit is fast and inexpensive. This makes it incredibly convenient if you have multiple payroll schedules. Consider either changing your pay period or payment option to save costs and increase efficiency when processing payroll.
Gusto supports direct deposit, making processing payroll even more manageable.
Think About Your Cash Flow
Your cash flow can be a great guiding factor when deciding how to pay your employees. Think about when money is available to pay employees and match payroll to that period. For example, if you charge clients at the beginning of the month, running payroll during this time makes sense.
But you’ll still have to account for your state laws. Additionally, this tip only works if you have regular cash flow. If your clients tend to delay payments or only pay quarterly, cash flow may not be a good deciding factor in this case.
Consider Changing Your Pay Periods
There are instances when you may have to change your pay periods entirely. Of course, you’ll need to meet some requirements, but the outcome will be worth the effort. Good reasons to consider changing your pay period include:
- Employees have requested a change
- You are spending too much time and money running payroll
- The business is facing cash flow issues
- There’s a change in exempt and nonexempt employees
It’s crucial that you refer to your state laws to guide the process of changing your pay periods. First, you’ll need to have your payroll experts spearhead the process. They’ll be familiar with the relevant laws and ensure that your new pay period doesn’t contravene the law. It is also worth talking to a lawyer to ensure that there are no contractual issues that might come up due to the change.
Next, set a date for when you’d like the change to take effect. Ideally, this should be toward the end of the fiscal year. Alternatively, you can schedule the transition toward the end of a quarter. This strategy will help streamline record-keeping.
Furthermore, you’ll need to inform the employees about the change. Be sure to provide advance notice. This will help employees adjust their budgets accordingly. This is especially true if you intend to decrease the pay frequency. Furthermore, allow employees to ask questions and educate them accordingly.
Finally, review the contracts. You don’t have to rewrite existing contracts. Instead, integrate the changes into the existing agreements. Remember to include the new pay schedule in your contract templates. This will ensure that there are no mistakes when onboarding new hires.
Remember to keeps employees informed of this upcoming change and remind them regularly as it nears.
The only thing left is setting deadlines for performing crucial payroll tasks. For example, you’ll need to set a deadline for when to collect timesheets. Similarly, set a specific time when you run payroll and set the date when employees get paid.
Be sure to check out our post on How to Set Up Direct Deposit for Employees. This payment option is sure to come up when deciding your pay period.