When I was a kid, my parents taught me the traditional Mother Goose rhyme to remember how many days each month had: “Thirty days hath September, April, June, and November. All the rest have 31….Except for February.” It always seemed odd that this supposed Mother Goose rhyme couldn’t figure out how to fit February in. The payroll calendar, at least for those employers with bi-weekly pay periods, doesn’t fit it in either. That means that while 2015 isn’t a leap year on the calendar, it will be a Pay Period Leap Year for many employers.
What is a Pay Period Leap Year?
Pay Period Leap Years are years with an extra payroll period. For employers with weekly pay periods, each year has 52 weeks (where each week is exactly 7 days) plus 1 or 2 additional days (if it is a leap year). Similarly, for employers with bi-weekly pay periods, 26 bi-weekly periods only account for 364 days each year, not 365 (or 366 in leap years). Those extra days add up, and employers periodically face an extra pay period for employees that they pay on a weekly or bi-weekly basis. Those are “Pay Period Leap Years.” If you pay employees weekly, your Pay Period Leap Year will occur every five or six years. If you pay bi-weekly, your Pay Period Leap Year will occur roughly every 11 years. Your exact cycle will also depend on the last day of your workweek, when you close your pay period and issue paychecks, and how you deal with payday holidays. This post will outline the most common situation, but please contact us if you need help determining whether the Pay Period Leap Year will apply to you in 2015.
How to Determine if 2015 is a Pay Period Leap Year for Your Business
If the year starts on a Thursday in a non-leap year, like 2015, you end up with 53 Thursdays. (If either of the first two days lands on a Thursday during a leap year, then you can also get 53 Thursdays). This means that for employers who pay employees weekly or bi-weekly, 2015 could be a Pay Period Leap Year! If your first weekly paychecks will issue on Thursday, January 1, 2015, you will have a fifty-third pay period on December 31, 2015. If your first bi-weekly paychecks will issue on Thursday, January 1, 2015, you will have a twenty-seventh pay period on December 31, 2015, depending on payday holiday processing rules.
2015 could also be a Pay Period Leap Year if your first payroll date will be Friday, January 2, 2015. If your first weekly or bi-weekly paychecks will issue on January 2, 2015, you will likely have a an extra pay period on December 31, 2015, because when a payday falls on a holiday (as it will on Friday, January 1, 2016), many employers issue paychecks on the business day before that holiday (Thursday, December 31, 2015).
Why is the Pay Period Leap Year a Big Deal?
An extra pay period does not matter for hourly employees who are paid for the actual time they work. However, you probably have realized by now that Pay Period Leap Years mean paying salaried employees their annual salary over either 53 or 27 pay periods in a year. Some simple math might help. For instance, if you pay an employee $52,000 per year, you would pay him or her $1,000 in each of 52 weekly pay periods or $2,000 in each of 26 bi-weekly pay periods. If you change nothing, in a Pay Period Leap Year, you would pay the employee $53,000 over 53 weekly pay periods (a 2% raise) or $54,000 over 27 bi-weekly pay periods (a 4% raise).
Handling Pay Period Leap Years
Obviously, paying employees extra money over the course of a year could have a significant financial and cash flow impact for employers of all sizes. The changes raise wage and hour issues, too. Here are three options for handling Pay Period Leap Years if you pay employees on a weekly or bi-weekly basis (again, employers on monthly and semi-monthly pay periods never have Pay Period Leap Years):
- Pay the same amount in each pay period as you did in the non-Pay Period Leap Year. As discussed above, if you do nothing, employees will receive an effective increase of approximately 2% or 4% in Pay Period Leap Years. This is the simplest approach, and presents little legal or practical risk (who complains about getting more pay?). Paying 2% or 4% more in a year primarily impacts wage earners at the top of the income scale, since they may hit the withholding limit for Social Security earlier, and the extra pay may trigger additional Medicare tax withholdings. Paying additional salary may impact 401(k) or other retirement contributions, too. If you aren’t careful, you could exceed annual contribution limits, triggering either penalties for your employees or the need to issue refunds. Your existing payroll systems or accountants likely account for this, though. We would encourage you to notify employees of this decision for two reasons. First, you are providing employees with a pay increase, so take credit for it! Second, you need to remind employees that the pay increase is temporary and that their annual pay will go back to normal after the Pay Period Leap Year when they again have 52 (or 26) pay periods.
- Divide the total salary by 53 (or 27) pay periods rather than 52 (or 26). This ensures that employees get the same compensation as in non-Pay Period Leap Years, but it also means employees would get slightly less per paycheck. Using our example above, a $52,000 per year employee would get $981.13 per week or $1925.93 every two weeks. Other than the potential employee morale issues, lowering the weekly or bi-weekly salary amount could put lower-paid employees below the current $455 salary threshold (sure to increase in 2015) and jeopardize their exempt status under the FLSA or state laws.
- Adjust only the last paycheck of the year. As with the second option, employees receive the same total pay for the year. However, this option only works for some salaried, exempt employees, since the reduction for salaried, non-exempt employees, among others, could result in violations of the FLSA’s minimum wage rules or state minimum wage and wage payment laws. This option is fraught with legal danger, and gives employees a nasty surprise at the end of the year, regardless of whether you advise them that this is the approach you plan to use.
Before you select an option, though, you must first examine your employees’ employment agreements, offer letters, or collective bargaining agreements. If those documents specify an annual salary only, then you have a choice to make. However, if those documents provide for a specific weekly or bi-weekly salary only, then you have no choice to make: you must select the first option, even though this means employees receive an extra paycheck because of the Pay Period Leap Year.
If next year is a Pay Period Leap Year, plan now for how to handle it and notify employees as soon as possible. Due to the various ways that bi-weekly paychecks in particular can be calculated, not every employer will face a Pay Period Leap Year next year. Some may experience it the following year, and some may have experienced it this year.