Employees are about to be very excited when they realize they're in a payroll leap year. Human resources, you know what that means: Extra payday.
This can be a rather confusing concept, so let's quickly break down the math behind how the payroll leap year works. Normally, there are 26 pay periods for 364 days each year explained Reuters. Therefore, over a couple of years, that 365th day adds up to a whole pay period. However, note that this issue only affects those that pay employees on a weekly or bi-weekly basis. Monthly or twice a month arrangements will not have to worry about the extra payday, nor will hourly workers. Staci Ketay Rotman a partner in the law firm Franczek Radelet, explained this to Society for Human Resource Management Magazine.
"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 how the employer addresses this issue," Rotman reported.
There are several ways employers can redistribute this money on top of employees regular salaries. However, one thing is for certain: businesses need to be well prepared for this extra payday because it will have an effect on the budget and failure to cooperate could be problematic.
HR solutions for a payroll leap year
Wage and Hours Insights blog laid out the logistics of how you can best plan for the extra cash. One option is to simply divide the total salary by 53 or 27 respectively, instead of 52 or 26 weeks. While this means your company won't have to worry about payroll leap years, it will mean you employees will have smaller paychecks per week. The blog also suggested altering the last paycheck of the year, however, this route only works for some employees as it could violate FLSA minimum wage rules.
Issues to look out for
There are some legal issues you need to address when altering pay periods. SHRM warns to keep an eye on compliance issues, especially with offer letters. Employers risk breach of contract when these documents contain a specified sum to be compensated per pay period. HR and payroll also need to account for the income tax withholding as well as any annual benefits adjustments. For any option you are considering, think about working with a payroll company that can help develop a plan that will best suit your business needs and avoid complicated legal matters.