Calendar's Quirk Can Pose a Payroll Challenge

By Bill Leonard Jan 11, 2012
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Just by adding an extra day in February, leap years can create some interesting challenges to employers. The extra day typically adds another workday onto the schedule and increases the odds that a business could have an additional payday for the year.

The reason for the potential extra payday is simple mathematics. You cannot divide 366 days evenly by seven no matter what kind of math or calculator you might use. So, leap years have 52 full weeks (or 364 days) with two more days for a total of 366 days.

This means that two days of the week will occur 53 times during a leap year. For typical years of 365 days only one day of the week repeats 53 times. It might not seem all that complicated, unless that 53rd day of the week falls on a business’s scheduled payday. If this happens, then employers that are used to having 52 paydays per year or 26 if they pay biweekly could face a payroll dilemma—on how to account for this extra payday.

The 53rd day of the week in 2011 didn’t cause payroll dilemmas for employers because it fell on a Saturday. The two extra days for 2012 will fall on Sunday and Monday. Because few employers issue paychecks on a Sunday or a Monday, this leap year should have a negligible effect on most employers.

“There is a small group of employers that have a Monday pay date,” said Pedro Cutino, director of product management for Automatic Data Processing Inc. (ADP), one of the largest payroll services companies in the United States. According to ADP, less than 1 percent of the company’s client base of nearly 570,000 businesses use Monday as a payday.

“These employers may need to consider the implications for the extra payday,” he said.

Software Can Help

The issue of the 53rd payday is, however, known well by most payroll managers, and most payroll planning software can help employers plan for the extra payday. While the effect of 2012 appears minimal, the story was much different eight years earlier. Many payroll managers called 2004 a “perfect storm” for leap years because the 53rd days of the week fell on Thursday and Friday—which are by far the most popular paydays.

“We do get a lot of calls when the additional weekdays fall on a Thursday or Friday, but the extra paydays and leap years just don’t pose much of a challenge to employers that have their accounting and payroll systems in order,” said Michael O’Toole, director of publications and government relations for the American Payroll Association (APA). “Since the extra weekdays in 2012 fall on Sunday and Monday, then it really shouldn’t affect employers too much, if at all. Still some employers do choose to adjust their employees’ pay to account for the extra pay period or extra day of work.”

Depending on when the extra days of the week in leap years or even normal years fall, calendars can have from 260 to 262 typical work weekdays (Monday to Friday). The mathematics works this way: 5 days x 52 weeks = 260 days, plus the one or two extra days depending on the year. Because employers typically pay for holidays, those days are included in the calculations.

If we use 2011 as an example, the 53rd day of the week fell on a Saturday, which had a minimal impact on work calendars. And even though 2012 is a leap year, there will be 261 workdays because the 53rd days of the week fall on Sunday and Monday.

According to O’Toole, the vast majority of employers use accrual accounting systems, so the extra workday typically isn’t an issue for them.

“Employees are usually paid for the workdays that they accrue during any given pay period, so the extra day in a leap year just isn’t that big of a deal,” O’Toole said. “However, it can affect employers that operate with strict fiscal-year budgets, and this tends to be public-sector employers.”

Most local and state governments are required by law to operate with strict annual budgeting and therefore must adjust their payrolls to account for the extra day in a leap year. It’s fairly straightforward for public sector employers to pay their hourly employees by budgeting and paying for an extra day worked. Salaried employees, however, present a different challenge. The extra day of the year during leap years can affect the take-home pay of salaried employees if their employers choose to account for the extra day. In addition, most government budgets must account for the cost to provide health insurance benefits for an extra day during a leap year. These costs for the extra day are extrapolated over the entire year and can therefore increase employee co-pays on health insurance premiums slightly for each pay period.

Some public-sector employers like the state governments of New York and Maryland have created websites that calculate the adjusted take home pay for salaried employees and the extra costs for health insurance premiums. The extra day of the year is factored into the normal annual salary, so salaried employees still will receive the same annual wage but their take home pay will vary slightly during the leap year.

“Most employees who work for public-sector employers understand that leap years will change their take home pay slightly, but when it’s factored for the entire year then the change is fairly insignificant and usually doesn’t create major hardships,” said O’Toole.

According to ADP’s Cutino, most employers outside the public sector choose not to recalculate the pay of salaried employees because of possible employee relations problems.

“It could potentially create employer-employee relations issues since salaried employees would see less in their pay each period,” Cutino said. “Often employers base employee salaries on a set weekly or biweekly amount rather than a yearly amount. By doing that, they can mitigate most of the problems raised by the quirks of the calendar.”

Payroll Tax Cut Could Pose Major Challenge

According to O’Toole, 2012 is the first leap year that his organization hasn’t received a flood of calls about how to plan payrolls for extra pay periods or workdays. He attributes the lack of calls to two things: first, the extra days of the week of 2012 falling on Sunday and Monday, and second, the continuing debate in Congress about extending a 2 percent payroll tax cut.

Congress passed a two-month extension of the tax cut in December 2011. It lowers the federal Social Security payroll tax on individuals from 6.2 percent to 4.2 percent.

At the end of 2011, Congress pushed the debate on extending the tax cut right up to the Christmas holiday, which forced employers to be prepared to continue with the tax cut or begin withholding an extra 2 percent from employees’ paychecks beginning Jan. 1, 2012.

By approving just a two-month extension of the tax cut, Congress created another huge headache for employers, O’Toole said.

“Employers can easily prepare for a tax withholding change at the end of the year, so the debate in December didn’t cause that many problems,” he said. “But extending the tax cut for two months into 2012 creates a very tricky situation.”

While leaders on Capitol Hill claim that the extension provides the opportunity to reach an agreement on an extension through 2012 and possibly beyond, Congress does have a history of pushing these agreements right up to the deadline.

“And if they don’t pass anything until the 11th hour on the final day, that means employers will have to be prepared for two scenarios of continuing the tax cut or readjusting the tax withholdings of their employees,” said O’Toole. “And that’s a huge problem because employers’ payroll systems just aren’t set up to change tax withholding rates in the same year, let alone the same quarter.”

The administrative costs and the costs to change computer systems to accept the different withholding rates could far outweigh the economic benefits of the 2 percent tax cut, according to O’Toole and others interviewed for the article.

“While it is true individuals do benefit from the payroll tax cut, employers could be facing a sizeable hit from the costs it will take to be ready for either eventuality—that a tax-cut extension is passed or not passed,” said O’Toole.

He said that the staff at the APA was working with congressional staffs to explain the problem and help ensure a speedy resolution.

“But you just never know what will happen with the politics on Capitol Hill, and we will just have to wait and see how quickly they move to resolve the issue,” O’Toole said.

Bill Leonard is a senior writer for SHRM.

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