Leap Year Can Add Interesting Wrinkle to Payroll Planning

By Bill Leonard Dec 19, 2007
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Leap years can create real consternation for payroll managers. By adding an extra day onto the calendar, the odds that a business will have an additional payday over the course of the year increase.

But the potential for an extra payday happens every year; it’s just that leap years seem to draw more attention to the quirk of the calendar, according to Scott Mezistrano, senior manager of government relations for the American Payroll Association (APA).

The reason for these potential extra paydays every year is simple mathematics, really. You cannot divide 365 days evenly by seven—no matter what kind of calculator or new math techniques you might try. So most years have 52 full weeks and one extra day. This means that one day of the week will occur 53 times. For example, the 2007 calendar has 53 Mondays, while all the other days of the week occur 52 times.

In leap years, the calendar has two weekdays that occur 53 times. If one of those days happens to coincide with an employer’s payday, then businesses with weekly pay periods will have 53 paydays while those with biweekly schedules will have 27.

In 2008, the calendar will have 53 Tuesdays and 53 Wednesdays. While those are not the most common paydays, some businesses still will have to deal with the extra pay periods.

“But it really doesn’t present that much of a problem to any business that has their accounting and payroll systems in order,” Mezistrano said. “It really shouldn’t affect employers too much, but some employers do choose to adjust their employees’ pay to account for the extra pay period.”

In 2004, the extra weekdays fell on Thursday and Friday. Those days by far are the most common paydays, according to Mezistrano, who refers to 2004 as “the perfect storm” for extra paydays.

“It really grabbed the attention of businesses. The number of calls to the APA asking this question always increases when leap years are approaching, but 2004 was a special case,” Mezistrano said.

But employers can relax for a while, that “perfect storm” scenario for extra paydays won’t occur again until 2032.

“It happens every 28 years, I suppose and that has to do with seven days a week times every four years,” Mezistrano said.

Still, some employers do face the possibility of having extra paydays in 2008. Most businesses just choose to pay their employees and not adjust for the extra pay period, while other employers adjust their salaried employees’ gross pay to account for the extra payday. The extra payday should have no effect on hourly workers.

“The problem for some employers comes when they look at the compensation of salaried workers and try and decide how to spread out their salary over 27 paydays instead of the usual 26,” Mezistrano explained.

Reducing salaried employees’ paychecks to compensate for the extra payday, however, doesn’t really take into account the fact that employees will be compensated on the first payday of 2008 for work performed during the last week of 2007 and won’t get paid for the final week of 2008 until the first payday of 2009.

“So if you look at the calendar, it usually works out for the days worked and paid,” Mezistrano said. “I think most employers realize this and just don’t worry that much about adjusting for the extra payday.”

Leap day, or Feb. 29, 2008, does fall on a Friday. The extra day means that there will be 262 traditional workdays (Monday through Friday) during 2008 compared to 261 workdays in 2007. Employers that have large numbers of hourly employees will incur an extra day of labor costs. However, most employers use accounting and payroll systems that adjust automatically for the extra labor expenses.

“The extra workday is really a separate issue from the extra payday,” Mezistrano said. “But it shouldn’t affect many employers, especially those that use a cash accrual accounting system.”

The additional day of 2008 will mean an extra day of sales and revenue for businesses. So, most businesses can easily cover the extra salary expense. The leap year problem will, however, have an effect on employers that have set annual budgets, such as colleges, churches, government agencies and school systems.

While these employers will pay hourly employers the same rate, they are adjusting the gross pay of their salaried workers to help them fund the extra workday of 2008. Many state governments have created web pages with salary calculators that show how an employee’s gross salary will be adjusted to account for the leap year.

For example, the state of Maryland has posted the following explanation on its web site:

“The 2008 pay scales reflect the leap year biweekly pay amount. The adjustment for the leap year day is necessary to fund the extra day’s pay. Biweekly wages will be adjusted back to the non-leap year biweekly amount for fiscal year 2009.”

Example:

Employee with annual salary of $33,841

Biweekly pay for leap year:

(366/14 = 26.142857) $33,841/26.14285 = $1,294.47

Normal biweekly pay:

(365/14 = 26.071428) $33,841/26.071428= $1,298.02

Organizations should notify their employees if they plan to adjust pay for the leap year, Mezistrano pointed out. Many states have statutes that require employers to give notice if they adjust workers’ pay for any reason.

“It’s also just a good policy for employers to be open about how and why they are adjusting employee’s pay,” Mezistrano said.

Bill Leonard is senior writer for SHRM Online’

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