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Periodic leap year issues can confound HR and payroll managers
Thirty days hath September,April, June and November.All the rest have 31, Except for February…
While the second month of the year typically has 28 days, in leap years—such as the forthcoming 2016—it sprouts a 29th. That seemingly innocuous extension can be a big headache for HR and payroll professionals—resulting in an extra payday in the calendar year, depending on when and how employees get paid. For some companies, instead of 52 weekly or 26 biweekly (every-other-week) paydays, there will be 53 or 27, respectively.
In 2016, the leap day falls on a Monday. Payroll departments must generally account for this, but some don’t plan ahead and will get into trouble.
To make matters more confusing, “in 2016, Jan. 1 falls on Friday, so if the employer pays biweekly the issue of 27 payroll dates may occur in 2015 or 2016, depending on the payroll date and how the employer addresses this issue,” explained Staci Ketay Rotman, a partner in the Chicago office of law firm Franczek Radelet, where she focuses on labor and employment law.
“With a payroll leap year, the effect on employees depends on which day of the week the year begins and ends on,” she noted.
For example, she pointed out:
• If the employer issued its first paycheck of 2015 on Jan. 1 (a Thursday), a 53rd or 27th payday will occur on Dec. 31, 2015 (also a Thursday).
• If an employer issued the first paycheck of 2015 on Jan. 2 (a Friday)
and its payroll policy provides that when paydays fall on a holiday, employees will be paid on the previous business day, then a 53rd or 27th payday will occur on Dec. 31, 2015 (a Thursday) because of the Jan. 1, 2016, holiday.
“Generally, every five or six years for a weekly payroll, or every 11 or 12 years for biweekly payrolls, a leap year will mean an extra payday,” said Eric Antich, vice president of business development for JetPay, a payroll services firm based in Center Valley, Pa.
The majority of the people that are affected by an extra annual pay date are employees who are salaried and exempt from overtime. “If you are an hourly employee, you just get paid for your hours,” Antich noted. “And if you’re paid monthly, obviously there are still 12 months in the year. If you’re paid semi-monthly, it’s the same situation and it doesn’t affect you. But if you’re paid biweekly or weekly and you’re salaried, that’s where there’s an issue.”
If a salaried employee is paid $52,000 a year, for example, an employer can recalculate the per-paycheck amount so it ends up working out to be $52,000 over 27 paychecks (issued every other week) instead of 26 paychecks.
Because Jan. 1, 2016, is a Friday, some employers that pay their exempt employees biweekly may choose to move their paycheck date back to Thursday, Dec. 31, 2015, so that there will be 27 biweekly pay dates in 2015 instead of 2016, Rotman explained.
These employers “may decide to issue a ‘bonus’ last paycheck in 2015 or wait and address the extra pay period in 2016. Either way, there are some key matters to consider when dealing with this pay predicament,” she noted. These issues include:
• Maintaining compliance with offer letters, contracts or other documents containing compensation information. “If a document provides for a specific amount to be paid biweekly, it seems clear that the employer should pay the stated amount for each paycheck, even if there is an extra pay period. Failure to do so risks breach of contract or wage theft claims,” Rotman said.
“If the offer letter says the employee will be paid X amount on a biweekly or weekly basis, then I don’t think you would have any room to make changes,” said Antich. “If the offer letter says the employee will be paid a specific annual amount, there is flexibility.”
• If the document provides for an annual salary, the employer then needs to weigh its options and risks with paying on 26 versus 27 weeks. “Part of the risk analysis would certainly include the applicable state wage payment law and morale issues,” said Rotman. “Another option for employers would be to move to a different pay period altogether—such as a monthly schedule—so long as the employee is truly exempt and the employer complies with applicable state wage payment laws.”
Assuming no contract issue is identified and the employer decides to reduce pay to even out over the 27 weeks, “employers must ensure that the exempt employee is making more than $455 per week currently, or the proposed $970 per week
once the Department of Labor issues its final overtime rule in 2016,” she advised. Otherwise, the employee may not meet the wage threshold to be considered exempt.
Other matters that Rotman said HR should pay attention to include:
• Adjusting for income tax withholding depending on the pay method chosen by the employer.
• Addressing or reconfiguring annual benefit elections since some popular employee benefits are capped. Communicate with employees that these adjustments could affect
withholding for 401(k) accounts and
health savings account deferrals, especially for those employees who seek to fund these accounts to their maximum levels, figuring out how much per paycheck to contribute to reach those limits exactly at year-end.
• Adjusting benefit accruals as necessary to account for the extra pay period.
“Unfortunately, a big drawback [of adding an extra paycheck and prorating each paycheck downward] can be morale,” Antich said, since the amount of each paycheck is reduced. Employers should expect pushback from employees if their payment is adjusted downward.
“Also now, with such a litigious society, there have recently been employees who have sued their employer, claiming they are not being paid correctly,” he said.
That’s a good reason for why employers should take care with how their offer letters are written, as both Antich and Rotman noted.
Another problem area can be state-ordered withholding for child support payments. “It would depend on the particular child support order and perhaps even the jurisdiction,” said Rotman. “It is likely that if there is an extra check issued, some deduction will be made. But there should be options for employees to seek a credit or refund if they think they have been overcharged by virtue of the deduction taken from the extra check.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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