It happens once every 11 years, and it usually sneaks up on employers. Not this time!
Typically, because our calendar year is 52 weeks, employers who pay their workers bi-weekly see 26 pay periods. In 2015, however, there is a total of 27 pay periods. That may sound strange, but when you run the numbers it actually makes a lot of sense.
26 bi-weekly pay periods cover 364 days — and we all know a calendar year has 365 days (or, on a leap year, 366). These extra days add up, and every 11th year the cumulation equals an extra two weeks before the clock resets.
So, what does this mean for your payroll? If you pay your employees based on a 26-period year, you could inadvertently give your exempt employees a 3.846% raise. Let's look at an example:
Your exempt employee is slated to earn $100,000 in 2015. You allocate bi-weekly payments based on 26 pay periods, so the employee earns $3,486 every two weeks. But when the 27th pay period rolls around, the $3,846 payment puts their total annual salary at $103,846 rather than the $100,000 that you agreed to pay.
Depending on the number of exempt workers you employ, this could have a significant financial impact.
There are a few potential courses of action you could take — but be very careful about your decision, as it could have legal implications and could affect employee morale.
Your first instinct might be to spread the remaining salary to be paid over the pay periods, including the extra one at the end of the year. This means slightly reducing your employees' income on a bi-weekly basis to account for the paycheck you'll have to dish out in December. Depending on the numbers, though, there's a possibility that your employees' salary commitment may not be met — and it could have an effect on their tax position. This strategy is best handled on a case-by-case basis, especially because you could open yourself up to wage litigation if there is any determined breach of contract or other issues.
There isn't much legal precedence to help guide you, mainly because the wage-hour environment has evolved since the last extra pay period occurred in 2003 — and, as a result, wage litigation has also increased dramatically.
You should start by reviewing the details of each worker's contract or salary agreement. If the documentation calls for a specific sum of money to be paid bi-weekly, you may not have a choice in the matter — legally, you'll likely have to continue to pay the bi-weekly sum, even if it means a bonus at the end of the year. If, on the other hand, your documentation outlines an annual sum, you may have legal discretion to adjust the bi-weekly payments or switch to a semi-monthly schedule. In all cases, asses the risks very carefully and be as transparent as possible with your staff.
