What issues should we consider when deciding on the frequency of payroll?

Many states have laws detailing when employees must be paid for the hours they have worked. These state wage payment laws may dictate the employer's pay frequency. An employer may choose to pay more frequently than the state law requires, but it may not pay employees less frequently. Although there isn't one perfect payroll frequency for all companies, listed below are specific issues to consider when deciding which frequency is best for your organization. Employees are generally paid in one of four ways:

 1.    Weekly: every week on the same day of the week.

• The more frequently an employer processes pay, the higher the employer's costs. Payroll companies typically charge based on each payroll run. When payroll is processed internally, staff time must be devoted to running payroll each week.
• Employees generally prefer this method as it provides them with pay the most frequently.

2.    Biweekly: every other week on the same day of the week.

• It is easier for payroll staff as well as for employees to calculate overtime when nonexempt employees are paid weekly or biweekly rather than semimonthly or monthly.
• The more frequently employees are paid, the more paperwork is needed—for example, twice as many time reports for biweekly pay as for semimonthly pay. There is also the potential for more errors by employees as well as managers when completing time reports over a two-week period, and these errors require more effort by employees, managers and the payroll department for corrections. 

3.    Semimonthly: two times per month, such as on the 15^th and the last day of the month.

• Overtime calculations are sometimes confusing when payroll is processed semimonthly. For example, some of the overtime in a given workweek may fall in a different pay period.
• Employees can be confused about when they are paid when the semimonthly pay date falls on a weekend.
• Timesheet submission dates are harder to predict with semimonthly pay. For example, it is not as easy to remember to turn in your timesheet on the 10^th and 25^th each month as it is to remember to turn in your timesheet every other Friday.
• Accounting departments usually like the fact that the end of the pay cycle coincides with the end of the month because it aligns with month-end and year-end accounting processing. 

4.    Monthly: same date each month.

• Cash flow for both employees and employers can be problematic: Employees only have income coming in once per month, and employers have a large cash outflow once per month.
• Overtime calculations are difficult, as mentioned under semimonthly method.
• Transaction costs are the cheapest of all payroll frequencies.

Some employers have two different payroll systems. For example, an employer may run a biweekly payroll for nonexempt hourly employees and a semimonthly payroll for exempt salary employees. Whatever your payroll frequency, it is best to clearly define the workweek, pay periods and corresponding pay dates well in advance to ensure employees understand what hours they are being paid for and when.