If the question of, “How will you handle 27 pay periods,” doesn’t sound familiar to you, don’t panic. It may not apply to your organization, or if it does, you still have options.
If your pay cycle is either weekly or bi-weekly, there is a good chance that some years will include an extra payday, although there is some variation to this rule based on the way the calendar falls and the day on which your organization pays employees.
It is also important to note that the extra payday only creates issues for exempt employees who, unlike their non-exempt counterparts who are paid based on hours worked, receive an equal portion of their annual salary each paycheck.
Finally, before agonizing over how to manage an extra pay period, employers should review any and all documents related to the terms of employment that are currently in place, e.g. offer letters or collective bargaining agreements. Specific wording or clauses in these types of documents may actually be the determining factor for which methods remain on the table.
How to handle the "pay period leap year"
Interestingly, despite the variation in the parameters listed above, one area where there is more consistency among local employers is in how they choose to address the pay period leap year.
When asked specifically how they handle years that have 27 versus 26 payrolls for exempt employees, 81% of respondents to 2014 ERC’s Payroll Practices Survey indicate that they “pay as usual.” This overwhelming response of essentially doing nothing has remained true since 2011 when the survey was first administered. Figure 1 below illustrates the other options employers may turn to:
The “other” category elicited several interesting responses, with more than one employer explaining that while in the past they had chosen to divide pay by 27 and adjust benefit deductions, moving forward they would not be making that same choice. They noted that although logistically this change worked smoothly, employees were displeased with a smaller bi-weekly paycheck and overall morale was negatively impacted.
Although these particular employers did not experience any compliance related issues, employers who choose to divide paychecks by 27 should be aware of any lower wage workers on an annual salary. If the new math puts their pay below the FLSA threshold, this would in fact alter their FLSA exempt status and require the employer to pay overtime, etc to these employees for one year.
Another alternative option, although not at all common, was to simply reduce the final paycheck of the year.
As legal experts point out, this final option can also be dangerous in terms of FLSA as well as state minimum wage laws for any salaried non-exempt employees that might fall under the minimum hourly wage during the final reduced pay period—not to mention the likely backlash and drop in employee morale that could accompany a significantly reduced final holiday paycheck.
Ultimately, no matter which option an organization selects to accommodate a 27 pay period schedule, the key is communication with employees. Clearly if any paycheck along the way is going to be smaller, employees will need to know in advance, but even for employers that do nothing this year, communication is still important. For these employees, an extra paycheck could mean as much as a 4% raise, a raise that will be confined only to that year. So whether your payroll budget is staying the same or hitting an all time high with 4% raises, making sure everyone is on the same page will allow for a much smoother and easier transition into the years beyond.
View ERC's Pay Differential Survey Survey Results
This survey reports on common pay differentials from Northeast Ohio employers for hourly employees, including shift differentials, lead premiums, overtime, and on-call pay practices.