In another question someone asked why would a company all of a sudden go from monthly to bi-weekly (among other issues). That got me thinking. What are the reasons we pick a payroll pay frequency? I'm a fan of Semi-Monthly. For me, it was easier on the cash flow, and less work processing but more importantly I have found the overwhelming majority of Employees don't manage their money well, and if I paid them Monthly, they'd be out of money in the 3rd week. Why do you choose the period that you use?
What payroll pay frequency do you use, and why?
Bi-weekly is fairly standard for the SMB market, but the size of the company is often a factor. Most of the clients we run payroll for prefer bi-weekly processing to keep billings current and financial statements clean. Most businesses also find it is better for cash flow. The notable exception to this is the construction industry or related businesses. Managing books for the construction industry can often be a bit more organized with weekly payroll processing.
Semi-monthly here. It's always two payrolls per calendar month. The employees know what to expect (15th and last day of the month) and there is no cross-period accrual of comp or comp-related expenses. The simplicity is what drives it for us and our users.
The no-accrual factor was a definite time saver... In fact, I made a simple credit to cash, db payroll payable (essentially a temporary account) for the 15th payroll and did one payroll transaction on the last day of the month.
My cash always tied, and my EOM figures were correct.
We moved from weekly to bi-weekly ~a year and a half ago for two reasons:
1. Cost savings -> half the # of payroll processing transactions per year thus lower processing costs and
2. Payroll processing time savings. We did a payroll process review and determined that, because of the rather simple and recurring nature of a large portion of our workforce (salaried, no OT) we could minimize the amount of task processing by ~40% over two week period which we needed as we were planning to grow our workforce by double and we wanted to limit any impact on payroll headcount.
A client just moved from biweekly to monthly to save on payroll processing fees.
My company has an unusual compensation structure which is higher
If I am dealing with a workforce that is mostly salaried individuals, then I prefer semi-monthly pay periods. It is much easier to manage, cash flow is predictable and there is no need for an accrual at month/year end.
With hourly payrolls, however, I prefer bi-weekly. This way, the employees have a consistent pay period ending date and their time sheets can be due on the same day every week of every month. Semi monthly pay periods for hourly employees can be confusing for them because the cutoff day (of the week) for time slips may be different from payroll to payroll. Of course, if you have an automated time clock, then this issue can be mitigated, but it is still nice for employees to have the consistency.
One final note: as an employee, I always liked the bi-weekly or weekly payrolls because of the occasional "extra" check you receive (2 times per year for bi-weekly and 4 times per year on the weekly payrolls). It was always nice to have a little extra cash for that particular month where the cycle worked in my favor.
From a cash flow prospective, I prefer annual payroll, but this would cause a financial hardship for most employees. With a staff of mostly hourly employees who generally live paycheck to paycheck, bi-weekly seems to work the best.
Salaried is monthly and hourly bi-weekly. I have been on a monthly payroll since 1984 even though I have changed companies. To us, hourly makes sense for bi-weekly to manage administrative costs but allow the employees a reasonable personal cash flow.
State laws differ. In our State, weekly payroll is mandatory for hourly, and I prefer to keep all payroll on the same schedule, both salaried and hourly.
I agree with Daniel and Mark, semi-monthly becomes messy if you have a lot of hourly employees. While salaried employees simply receive a half month of salary, hourly employee pay fluctuates based on the number of working days in the half month - and most are less able to deal with the fluctuations.
I like semi-monthly for entities using monthly
I prefer semi-monthly for entities using monthly accounting perioeds. Fees are for only 24 payrolls a year; accruals are easy; and data for cost rate determination is more readily determinable. Accrual issues for weekly and semi-weekly have to includ the fact thar are more than 52 or 26 periods in a year, resulting in the "extra" pay period every 7 or 14 years.
Some Industries need to be on weekly payrolls - usually manufacturing industries with union employees may require weekly payrolls by contract. Watch out some states and cities do not allow monthly payrolls for some types of employees.
I agree with Mark Perlin's answer that business that do mfg. and have lower income workers have to pay weekly. Our employees go paycheck to paycheck and have little savings. I also have worked in high tech business where bi-weekly or monthly is the standard. I have been able to have our bank pick up the payroll processing cost based on the balances we maintain in our commercial account.
Last time I did mfg payroll, I had 1/2 the employees coming into my office to complain about their check being 1 cent different (rounding).
It was a weekly joy...
From my experience, it really helps if you have gone to a 4-4-5 accounting calendar where each fiscal period consists of 13 weeks exactly (you have the issue at calendar year end for most companies, but that is a minor issue). You set up the payroll to be bi-weekly, with the period ending on a Friday. For accounting and accrual purposes at close, you will always have either a 1 week accrual period, or a two week accrual period, which means what you do to speed up the close is book either 50% of the previous payroll period as the accrual or 100%. Simple, effective and close enough to justify the substantial amount of time and effort saved in so called "getting it right". It is ALWAYS better to put out numbers faster that are very close to reality, than to close very slow with supposedly "perfect" numbers. Some may argue that by going to bi-weekly, you are incurring more fees from the payroll processing company since you have processed at least 26 pay runs (assuming you never do any special runs). I argue that those fees are de minimus as compared to the benefits gained (less time spent and a faster close achieved). It just becomes like clockwork, and staff ccan move along to work on higher value add work.
Bi-weekly accruals are a waste of time not to mention two extra pay periods every yaer. Semi-Monthly with 15th and LDM pay dates seems to be the most intuitive. Monthly payroll cycles are risky in the fact that each State may have rules about when the pay date must be. CA's rules are the 26th of the month and NY has certain types of jobs that can and cannot be paid on a monthly schedule. Semi-monthly is the way to go, perfect balance of streamlining accounting and transparency with team members. The next two questions is how you deal with hourly employee hours? What payroll platforms best support a semi-monthly schedule?
Tim makes a very good and important point, that is: the frequency of payment of wages is governed by law. In some states, wages must be paid weekly for certain employees and bi-weekly for others. A majority of states do not allow the monthly payment of wages. The U.S. Department of Labor has a useful chart, by state, showing the required frequency of payments. Here's the link to the chart: http://www.dol.gov/whd/state/payday.htm
For myself, I find pros & cons for both bi-weekly and semi-monthly (never dealt with monthly). But there is an additional issue for hourly employees who are paid semi-monthly. Overtime may still be calculated on a weekly basis depending on the industry and the state. I worked for a company at one time where the new ownership converted all employees from bi-weekly to semi-monthly. Because the overtime period didn't match the pay period, I had three or four people in my office every payday convinved that they had been shorted on their overtime.
I agree with Robert that 4-4-5 (or its variants) with bi-weekly payroll is a dream scenario - for entities that do not have government grants or contracts. (Government agencies only understand months, which would make billing and budgeting a nightmare.) When Knight-Ridder converted to 4-4-5, it greatly simplified budgeting and reporting, as there were always the same number of Sundays in the comparable reporting period. IOW, the conversion is highly effective when it matches the business cycle.
That being said, I am a proponent of bi-weekly payroll versus semi-monthly no matter the reporting period, due to the consistent length of the pay period and synchronization with overtime rules. It is a simple matter to design an accrual template, export the source data and import the resulting JE.
Most jobs I've had have been either weekly or bi-weekly. Some with weekly for hourly and bi-weekly for salaried. I like to think in terms of weeks and try to always use a 4-4-5 closing schedule for the month's to eliminate payroll accruals that way.
There are pluses to each format. Employees can enjoy bi-weekly payroll from the standpoint of predictability - they know they are paid every other Friday, for example (versus a floating semi-monthly date). In addition, they get used to essentially getting paid twice a month, and they are pleased to get that seemingly "bonus" third payroll twice a year (26 pay periods vs. 24 for semi-monthly). Semi-monthly is the most common pay frequency for professional companies (15th and EOM being most common) and works well for employees who have mid-month bills and end of month mortgage/rent. Also clean from an accounting standpoint. Weekly payroll has become rare; construction is a main user of that frequency. And of course with weekly, employees get used to being paid four times per month, and get that "bonus" 5th payroll four months per year.
I have done all the choices and have also changed back. My current preference is semi-monthly, especially for professional (salaried) employees. In an hourly environment, especially for those paid on the lower side, weekly may be best to help them with cash flow.