A pay period is a specified date range that an employer uses in the workplace to gauge employee hours worked in order to complete accurate payroll. A pay period can vary from weekly, bi-weekly, monthly, and semi-monthly.
Common pay period mistakes
Plenty of mistakes can be made when setting up a pay period and workweek. For example, we all think of a week from a Monday to Monday or Friday to Friday, and so on. But when it comes to properly setting up a pay period this is not how it works. A specific pay period should reflect on a specified workweek. This can also be said when setting up paid time off (PTO). Make sure PTO is setup for the same timeframe to reflect regular pay periods.
A very common mistake that an employer makes is miscalculating a workweek to determine a pay period. A workweek is described as a 7 day consecutive period in which an employee works. If your working week starts on a Monday, then it would conclude on the next Sunday - this will give you 7 straight days.
The mistake comes in when employers accidentally put Monday as their start and Monday as their end days. As previously mentioned, this would not equate to 7 days, but instead would be 8. For more details on what is a workweek and how the Department of Labor describes it, please click here.
Different types of pay periods
Companies can vary when it comes to setting up their pay periods. It is important to check with the U.S Department of Labor Wage and Hour Division for your state’s payday requirements. Some of the most common periods include:
1. Weekly pay periods - When employees are paid on a weekly basis typically based on a 40 hour workweek (for hourly employees and before overtime). For example, every Thursday or Friday of the week. This pay method used to be common, but has become less popular due to payroll expenses.
- Pros: Employees are paid more frequently and a great option for hourly workers.
- Cons: Higher payroll costs due to frequent processing.
2. Bi-weekly pay periods - When employees are paid every two weeks and usually reflects an 80 hour workweek (before overtime). This option has become very popular with the way employers pay their workers.
- Pros: Reduces payroll expenses for the company and is a good option for hourly and salary employees.
- Cons: Employees who work overtime may not want to wait the additional week to collect their pay (they may urgently need the additional money and could be the reasoning why they worked OT).
- Yearly payments: 26 - 27 (depending on the year)
3. Semi-monthly pay periods - Similar to bi-weekly, except semi-monthly is usually a 86.67 hour work period (before overtime). Pay days typically include the 1st and 15th of every month or 15th and 30 of each month.
- Pros: Lower payroll processing costs, payment schedule is easier, popular option for larger organizations.
- Cons: Could make calculating overtime a little challenging and cause some confusion when adjusting hours for payroll, new employees may have to wait several weeks before receiving their first paycheck, compliance and law issues may be hard to understand.
4. Monthly pay periods - Hours per pay period for monthly hourly employees (before overtime) is usually 173.33 hours per pay period. Payments are disbursed at the end of each month to the employee.
- Pros: The lowest payroll costs when compared to the 4 options, processing time is very quick, easier to stay organized with taxes, good for salaried employees, simplifies company budgeting.
- Cons: Most employees do not want to wait this long in between paychecks, not easy to integrate pay raises or promotions.
Why payroll should be processed after hours worked are completed for that pay period
Employers should start processing payroll after an actual pay period has been worked. For example, if your payroll cycle starts December 3rd and ends December 16th, then you would start the process December 17th.
The timeline required for the process of payroll can take longer than some may realize. Time cards must be approved and transferred to payroll, funds will start to be debited from company’s bank account, a day or two for funds to be processed, funds are finally deposited into employees bank accounts.
Lets use our pay period example from above using the start date of December 3rd and an end date of December 17th to show a timeline example. (This is only an example and the timeframe may be different than your company’s process)
Also, by waiting to run payroll after a pay period it will reflect an accurate time card to base your payroll on. Some employees may take vacation or sick days during this time period and it can cause payroll errors if you choose to start the payroll process too soon.
According to an article created on How to Decrease Payroll Errors, payroll mistakes can cost an average of $4 - $9 each cycle, not including the amount you may be overpaying employees.
Orphan days and unpaid overtime
There are some pay period scenarios that can lead to missed and subsequently unpaid overtime. This is a serious error, as it can lead to DOL investigations, penalties and payback with interest. Or even worse, employees not trusting their employers.
This situation can occur with semi-monthly and monthly pay period types only, if you're on weekly or bi-weekly then you’re safe. At the heart of the issue is the lack of understanding and establishing a start of work week. The DOL defines a work week as any 7 consecutive days. It does not matter when a work week begins, it could begin on a Wednesday, but must always end 7 days later on a Tuesday.
How overtime can get lost
Furthermore, when calculating overtime hours, employers must use the established start day of the work week to calculate when weekly overtime begins.
Consider this semi-monthly pay period configuration…
Pay Period Type: Semi Monthly
First Pay Period: 1st - 15th (always 15 days)
Second Pay Period: 16th - end of month (13 - 16 days depending on month)
The main issue here is that the pay period do not line up with work weeks. You can see the first pay period has 15 days and the second pay period has 16 days. You will notice that on the 15th, 29th, 30th & 31st are “orphaned days”.
On the 15th, the employees work week should have started, this is when days counting toward overtime should have started. But many employers erroneously start the work week on the 16th, one day late, thus shorting the employee one day before weekly overtime kicks in. The situation is even worse at the end of the month when there are 3 orphaned days. What may happen here is that the employee is shorted 3 days before overtime kicks in.
How to fix the semi-monthly and monthly overtime pay period issues.
To properly calculate overtime in monthly and semi-monthly pay cycle situations, the employer must establish an official work week and calculate overtime based on the start of the work week, not leaving any orphan days behind. When calculating overtime, the employer must determine if the work week starts on the pay period start date. If the pay period start date and work week start date match then great, but if not, you will need to pull up the previous pay periods worked hours, and start calculating weekly payroll from the start of the work week.
Alternatively, you can opt for a modern time tracking solution like OnTheClock. OnTheClock automatically calculates overtime for semi-monthly and monthly pay periods.
An employee time tracking system is a great way to monitor, create pay periods and produce accurate time cards for your company and employees.
- You have the ability to setup your pay period that is geared towards your company.
- Employees’ hours worked are logged and automatically calculated on their time cards.
- Once your pay period is finished, you are then able to seamlessly export your time card information over to the payroll department for processing.
- Reduce payroll expenses by acquiring accurate pay periods and time cards.
Employee time clock systems also integrate and support many known payroll providers such as: QuickBooks, Xero, Thomson Reuters, ADP, Gusto, Paychex, Paylocity, Ceridian, Sage, ConnectPay, Payroll Connect, and more.