Which do you prefer or works better for you: payroll schedule bi-weekly vs semi-monthly?
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My experience has been that it depends on who makes up your payroll. If you have a lot of exempt from OT employees (salaried workers), I think semi monthly works better. If you have lots of hourly (non-exempt), I think every other week works better since you end up with the same day as the end of your payroll period. It is easier to control the time sheet / reporting process.
With the bi-weekly, you also end up having to make an accrual at the end of every month (or reporting period) for the stub period which can be a small pain. There can also be some quirks if you are doing inventory/manufacturing costing as well.
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We used semi-monthly and with pay days on the 15th (plus/minus Sunday) and the last business day of the month we never had to do payroll Accruals as such (we also had a use or loose at calendar end vacation and sick time policy).
Once everyone gets use to it, it works just fine.
I do agree with Ted that this may not be ideal for non-exempt employees.
To add to this, I made a simple transaction on the 15th (cash/payroll payable) and the full gamut of entries on the 30th (wiping out the contra-liability I created with the 15th payroll).
This way cash was always correct.
Depending on the size of your operations, you can always do both. We pay salaried monthly, and hourly, bi-weekly. It works pretty well.
Agree with Wayne on semi-monthly. With bi-weekly, folks are continuously asking "when do we get paid?" With semi-monthly, you explain one time that they get paid on the 15th and last day of the month and you never need mention it again. It's simpler for the user, and no partial period accruals b/c you always pay on (or through) the last day of the month. Very simple.
I agree with Semi-monthly as preferred. One area to focus in providing more clear communications is the payroll cutoff for hours to be submitted and then a potential "true-up" that will occur in the following pay-cycle. This tends to confuse employees. More transparent schedule of cut-off periods is recommended with "examples".
I worked for a bank as an employee that paid me monthly. As an employee it was great. A little personsal budget fore thought, but not difficult. I am sure it cut entries in half.
Agree on Semi-monthly. Easy to understand and easy to deal with accruals. I also suggest paying in arrears, if you can (e.g. paydate at EOM covers the 1st through the 15th). This gives your payroll department, and employees a little more time to get their timesheets and other paperwork in, if applicable. This may be a harder sell though for certain folks, but the impact is mainly felt at initial point of hire. As a side note, such a shift does help the company's cash flow...
Also, if you have a 401k plan at your company, you should plan to make funding payments the Tuesday after each paydate. This provides consistency with the IRS/ERISA, which is what they are looking for and avoids bank holiday issues (they are almost/never on a Tuesday). I learned this the hard way with a 401K IRS Audit, but came out clean with them after such a shift.
What do you do now and why do you think it might be worth changing?
If whatever you are doing now is generally workable, I would think carefully before changing it, especially to less frequent payment. If changing to less frequent, I would expect employees to not see it as a plus, even if they eventually adapted.
However, if changing to more frequent payment, some employees would surely appreciate it.
If a small company, you might ask the employees what they think before going ahead with it.
I approach things about payroll differently. IT IS ALL ABOUT THE NEEDS OF THE EMPLOYEES. Certain industries have different norms and different types of employees have different financial needs. I do NOT have any qualms/issues if the process is a little "inconvenient" (within reason) for financial personnel. The finance (HR ?) department is there to service employee needs.
I acknowledge the need for process (cost) improvement but I do NOT have any issue if I need to bend (a "little" and as I said "within reason" ) to satisfy employee needs.
Years ago we shifted from bi-weekly to semi-monthly for the reasons cited above and it was indeed preferable and serviceable to all involved.
I have been involved in a number of companies with varying payroll cycles, including companies that had 3 different cycles depending on locations and exempt vs. non-exempt.
Some consideration also has to be given to how your payroll cycles match up with your financial reporting cycles. A biweekly payroll while on a calendar month financial cycle may result in additional calculations in order to properly record and accrue payroll expense, just as a 1st and 15th payroll cycle might be more difficult with a company on a 4-4-5 calendar. We are in a retail industry and have a biweekly payroll cycle while our accounting calendar is a 13 period, 4 week cycle, so it is a good match.
Monthly is my new favorite and if you start out that way employees can manage it.
2nd choice is biweekly so pay periods are always 80 hours and employees can easily remember that timesheets are due every other Friday and payday every other Friday.
This works well with biweekly project status reports and biweekly customer billing.
Stellar discussion everyone, thank you. FYI - the most employee friendly frequency is actually weekly. Yes, I know it's a "burden" on the employer - but I believe you can actually "sell" the weekly frequency as an added employee benefit. IMHO :) Thx, GAP
Has anyone ever encountered an extra pay period in a year? We are bi-weekly and have 26 pay periods in a year. My HR department has told me that this year we will have a 27 week period and that this occurs every 8 yrs or so. I have never experienced this with other employers. Can anyone shed some light on this?
I just looked at the 2014 calendar, I don't think it is possible.
My strong preference is also bi-weekly for the consistent 80 hours per pay period. Employees are not confused, as they know they are paid every other Thursday. Interestingly, we have a 27th payday this year year because we are advancing payday from Thursday, January 1 to December 31. It has to occur sooner or later due to that pesky 365th day in every year and 366th day every fourth year.
We are a non-profit using cash basis accounting. Being cash basis, we do not make payroll accruals simplifying the process for us. Since we are closed on Friday, the semi-monthly Saturday/Sunday plus or minus end of the month payday becomes quite complicated. It is my understanding more companies pay bi-weekly than semi-monthly primarily due to the consistency of the 80 hour week and for us the simplicity of payroll tax payment and reporting. Another consideration in my opinion is recognition that lower income staff can be financially impacted by the inconsistency of the end of month pay dates and an extended number of days between paychecks during some months of the year. Both our hourly and salaried staff are paid bi-weekly.
My previous employer was an oil company with over 3000 employees world-wide and changed over to bi-weekly 20 or more years ago so my own personal experience with bi-weekly pay extends now to over 30 years. Some people with automatic drafts from bank accounts might be more challenged budgeting with bi-weekly pay but having self-discipline to hold funds from a paycheck a week or two in advance of the draft is a learned skill. If the choice of bi-weekly or semi-monthly is optional, I would defer to meet the needs of the lower income personnel and elect bi-weekly.
We did have 27 pay periods in 2014 because our payday is on Wednesdays. That can occur every 8 to 11 years depending on the day of the week you issue payroll and how the calendar dates fall. This was the first time it happened for us since we started bi-weekly payroll in 2005. The affect of the extra pay period really only impacts the salaried or contract employees since hourly must be paid for actual hours worked. The salaried or contracted compensation for the year can be divided by 27 pay periods resulting in a bit less per pay period but fulfill the contracted or expected compensation for the year or the extra pay period can be anticipated in the budget process and considered a bonus to staff for that one year. By some calculations the 26 week bi-weekly payroll can result in compensation less than agreed or contracted amount by a few dollars and the 27th pay period can be viewed as making up that shortfall. We opted to ignore it and consider it a bonus.
As an exempt employee, my preference is to be paid monthly or semi-monthly. It is also a preference from an accounting point of view as it makes it easier for month-end and year-end accruals.
However, my employer has chosen to pay bi-weekly and I had very little difficulty adapting to it. We do percentage accruals at month-end since the bulk of our employees work a 5 day, M-F work week, and it works out well for everyone.
The issue of 27 pay days a year is really only a timing issue. Since there are actually 364 days in a 52 week year, in most years you are actually underpaying salaried employees by one or two (leap years) days per year. One way to resolve the pay issue for salaried employees is to express their salary as biweekly instead of annual. And to be completely accurate, you can choose to accrue one day's pay for each exempt employee every year so the expense is correctly charged to year in which it was actually earned.
We have hourly shift workers, non-exempt salaried and exempt salaried personnel. We use a semi-monthly payroll period because.....well, because it's always been done that way.
A biweekly payroll period would work better for the time clock employees. Due to unconventional scheduling and issues with holidays, the semi monthly time frames create issues for my payroll department as well as the individual employees.
We have one employee who, without failure approaches payroll on February 28th to complain that they "shorted his check". It is smaller of course, due to timing and he was paid all that was due.
Also, I saw no mention of state law in this discussion. But, that can come into play when selecting payroll frequency. Semi monthly isn't allowed in all states in all situations IIRC.
Which states don't allow semi-monthly? Never heard that said before .... Learn something everyday....
From an employee's perspective I prefer Semi-monthly. It's easier for me to plan on when to pay bills (1st half or 2nd half). From an employer's perspective, I've found it easier to handle on a bi-weekly basis. Hours are due on Tuesday every other week, and payroll is always processed corresponding Fridays.
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