How to Set Up Pay Periods to Work With Pay Dates

A pay period is a specified date range an employer specifies in the workplace to gauge employee hours worked in order to complete accurate payroll. A pay period can vary from weekly, biweekly, monthly, and semimonthly. Businesses often select a pay period based on how it fits their budgets and operational needs.

Different Types of Pay Periods

Regarding the process, companies may take different routes when setting up their pay periods. It's 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 pay periods include:

1. Weekly pay periods - Employees are paid on a weekly basis. This variation is typically based on a 40-hour workweek (for hourly employees, before overtime). For example, paychecks would be disbursed weekly, on a Thursday or Friday. While this pay option was once incredibly popular, it has become much less so as of late due to payroll expenses.

• Pros: Employees are paid more frequently.

• Cons: Higher payroll costs due to frequent processing.

• Yearly payments: 52

2. Biweekly pay periods - Employees are paid every two weeks. This variation is usually reflected as an 80-hour workweek (before overtime). This option is incredibly popular in today's labor market.

• Pros: Reduces payroll expenses for the company.

• Cons: Employees who work overtime may not want to wait the additional week to collect their pay (they may urgently need the additional money, hence the reason they have opted to work overtiem shifts).

• Yearly payments: 26 - 27 (depending on the year)

3. Semimonthly pay periods - Similar to biweekly, except semimonthly is usually an 86.67 hour work period (before overtime). Paydays typically occur on the first and 15th of every month or the 15th and 30th of each month.

• Pros: Lower payroll processing costs and a simpler payment schedule.

• 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 paychecks. Compliance and law issues may be difficult to interpret at first.

• Annual payments: 24

4. Monthly pay periods - Hours per pay period for monthly hourly employees (before overtime) are usually 173.33. Payments are disbursed at the end of each month.

• Pros: This option offers the lowest payroll costs when compared to the four previous options. Processing time is very quick, it's easier to stay organized with taxes, the schedule is good for salaried employees, and it simplifies company budgeting.

• Cons: Most employees do not want to wait this long in between paychecks. Additionally, for employers, it's not easy to integrate pay raises or promotions when utilizing this approach.

• Yearly payments: 12 

Why Payroll Should Be Processed After Work Is Completed

Employers should start processing payroll after an actual pay period has been worked. For example, if your payroll cycle starts Dec. 3 and ends Dec. 16, then you would start the process December 17.

The payroll processing timeline can take longer than some may realize. Timecards must be approved and transferred to payroll, funds must be debited from the company’s bank account, a day or two must be allotted for the funds to be processed, and the funds are finally deposited into employees' bank accounts.

Let's use our pay period example from above as an example. (This is only an example and the timeframe may be different than your company’s process)

Waiting to run payroll after a pay period allows the company to base its payroll on actual hours worked. Some employees may take vacation or sick days during this time period, which may cause payroll errors, especially if a company chooses to start the payroll process too soon.

According to an article created on Are Payroll Errors Costing You Big Time?, payroll mistakes can cost an average of $291 on average.

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 only occur with semimonthly and monthly pay period types. If you're on weekly or biweekly schedule, then you’re safe. At the heart of the issue is the lack of understanding and establishing a workweek. The DOL defines a work week as any seven consecutive days. It does not matter when a work week begins -- it could begin on a Wednesday but must always end seven days later, on a Tuesday.

Losing Track of Overtime

Furthermore, when calculating overtime hours, employers must use the established start day of the work week to calculate when weekly overtime begins.

Consider this semimonthly pay period configuration…

Pay Period Type: Semimonthly

First Pay Period: 1st to the 15th (always 15 days)

Second Pay Period: 16th to the end of the month (13-16 days depending on the month)

The main issue here is that the pay periods 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, and 31st are “orphaned days”.

On the 15th, the employees' workweek should have started, and this is when days counting toward overtime should have started as well. But many employers erroneously start the workweek 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 three orphaned days. What may errantly happen here is that the employee is shorted three days before overtime kicks in.

How to Fix the Semimonthly and Monthly Overtime Issues

To properly calculate overtime in monthly and semimonthly pay cycle situations, an employer must establish an official workweek and calculate overtime based on the start of the workweek, not leaving any orphan days behind. When calculating overtime, the employer must determine if the workweek starts on the pay period start date. If the pay period start date and workweek 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 semimonthly and monthly pay periods.

An employee time tracking system is a great way to monitor hours, create pay periods, and produce accurate timecards for your company and employees.

• You have the ability to set up any pay period that is right for your company.
• Employees’ hours worked are logged and automatically calculated on their timecards.
• 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.