Preparing for the 2016 Pay Period Leap Year

Historical records show that at least twice in history, countries have observed February 30 on the calendar.  Sweden added the date to its 1712 calendar to correct an earlier calendar error and the Soviet Union observed February 30 in 1930 and 1931 as an attempt to shift to uniform 30-day months and 5-day weeks.  2016 will be a special year, too, and not just because the Copa America tournament comes to the United States for its 100th anniversary.  No, we’re not adding a February 30.  Instead, what makes 2016 special for wage and hour attorneys is Pay Period Leap Year!

Like the Gregorian calendar created by Pope Gregory XIII in 1582, the bi-weekly payroll calendar doesn’t fit evenly into a single, 365-day year.  The Gregorian calendar addresses this problem by adding 1 day every four years at the end of February.  The bi-weekly payroll calendar “adjusts” by adding a 27th pay period every (roughly) 11 years. For employers on a weekly payroll cycle, it happens twice as often.  For many employers, 2016 will be a Pay Period Leap Year (if you didn’t already celebrate one in 2015).

The Pay Period Leap Year

The Pay Period Leap Year doesn’t really exist in the same way that February 29th does.  It’s just a phrase that I’ve coined to explain a phenomenon that bears attention because it only happens roughly once per decade.  Nonetheless, it is critically important, and for large employers or employers with largely salaried workforces, in particular, the Pay Period Leap Year could make a substantial impact on the bottom line this year.

Put simply, Pay Period Leap Years are years with an extra payroll period. For employers with weekly pay periods, each year has 52 weeks (where each week is exactly 7 days) plus 1 additional day (non leap years) or 2 additional days (if it is a leap year, like 2016). Similarly, for employers with bi-weekly pay periods, 26 bi-weekly periods only account for 364 days each year, not 365 (or 366 in leap years). Those extra days add up, and when the calendar aligns, employers will periodically face an extra pay period for employees that they pay on a weekly or bi-weekly basis. Those are “Pay Period Leap Years.” If you pay employees weekly, your Pay Period Leap Year will occur every five or six years. If you pay bi-weekly, your Pay Period Leap Year will occur every 11 years or so.  2016 will be a leap year for nearly all employers, but your exact cycle will also depend on the last day of your workweek, when you close your pay period and issue paychecks, when direct deposits are processed, and how you deal with bank holidays. This post will outline the most common situation for 2016.

Determining if 2016 is a Pay Period Leap Year for Your Business

If the year starts on a Friday in a non-leap year, like 2016, you end up with 53 Fridays. (If either of the first two days lands on a Friday during a leap year, then you can also get 53 Fridays). For the majority of employers who pay employees on Fridays, this means that 2016 will be a Pay Period Leap Year (if you didn’t celebrate one in 2015, which began on a Thursday)!

You have a Pay Period Leap Year in 2016 if:

• your first weekly paychecks will issue on Friday, January 1, 2016; OR
• your first bi-weekly paychecks will issue on Friday, January 1, 2016.

In the former case, you will have a fifty-third pay period on December 31, 2016.
In the latter case, you will have a twenty-seventh pay period on December 31, 2016

Of course, this depends on bank holiday processing rules.

You will not have a Pay Period Leap Year in 2016 if:

• your last 2015 weekly paychecks will issue on Thursday, December 31, 2015; OR
• your last 2015 bi-weekly paychecks will issue on Thursday, December 31, 2015.

In this case, your Pay Period Leap Year was likely in 2015 (in which case, keep reading, because you might need to make adjustments if you have overpaid employees).

The Importance of a Pay Period Leap Year to the Bottom Line

This issue applies only to certain salaried employees.  Hourly employees never experience a pay period leap year because they receive pay for the actual number of hours they work.  Employees paid a salary on a monthly or semi-monthly basis receive either 12 or 24 paychecks per year, no matter what.   However, salaried employees (whether exempt or non-exempt) who normally receive their annual salary over 27 pay periods (or 53, if you pay weekly) during the year will fall into this category.  Take a look at the math:

If you pay an employee $52,000 per year on Fridays, you would pay him or her $1,000 in each of 52 weekly pay periods or $2,000 in each of 26 bi-weekly pay periods. If you change nothing in 2016, in a Pay Period Leap Year like 2016, you would pay the employee $53,000 over 53 weekly pay periods (a 2% raise) or $54,000 over 27 bi-weekly pay periods (a 4% raise).

Upshot for Employers: Handling Pay Period Leap Years

As I alluded to above, paying employees extra money over the course of a year could have a significant financial and cash flow impact for employers of all sizes. The changes raise wage and hour issues, too, no matter where your employees are located. Here are three options for handling the 2016 Pay Period Leap Year if you pay employees on a weekly or bi-weekly basis (again, employers on monthly and semi-monthly pay periods never have Pay Period Leap Years).  If you are not reading this post until after 2016’s payroll year has started, you might need to make a few additional adjustments, but you are not too late.

Option 1: Pay the same amount in each pay period in 2016 as you did in non-Pay Period Leap Years.

As an employer, the Pay Period Leap Year does not require you to do anything in 2016, though that decision comes with a cost.  Salaried employees paid on a weekly or bi-weekly basis will receive either a 2% or 4% pay raise in Pay Period Leap Years like 2016. This is the simplest approach, and presents little legal or practical risk if you communicate it to employees (what employee complains about getting more pay?). For highly compensated employees or those socking away a percentage of their income in your company’s 401(k), this might mean hitting the withholding limit for Social Security earlier, triggering additional Medicare tax withholding, or reaching the limit on 401(k) contributions specified by the IRS. Paying additional 2% or 4% more in salary may impact other retirement contributions, too, triggering either penalties for employees or refund requirements for employers.  Most payroll systems and accounting departments  likely account for these limits, though.

The key for this option is to notify employees that you are doing it.  Many employers in 2016 get a once-in-a-decade opportunity to tout a temporary pay raise for employees.  If you can swing it financially, consider this option. Most importantly, though, your notice should remind employees that the pay increase is temporary and that their annual pay will go back to normal after the Pay Period Leap Year when they again have 52 (or 26) pay periods.

Option 2: Divide the total salary by 53 (or 27) pay periods rather than 52 (or 26).

Option 2 is revenue neutral.  At the end of the year, employees impacted by the Pay Period Leap Year in 2016 will receive exactly the same salary as in non-Pay Period Leap Years.  On a week-to-week basis, it also means that employees receive slightly less per paycheck. Using our example above, you would pay an employee with a $52,000 per year salary $981.13 per week (instead of $1000) or $1925.93 every two weeks (instead of $2000) in 2016, slightly less than in non-Pay Period Leap Years. Other than the potential employee morale issues, lowering the weekly or bi-weekly salary amount could put lower-paid employees below the current $455 salary threshold (sure to increase in 2016 once the new regulations are released) and jeopardize their exempt status under the FLSA or state laws.

Option 3: Adjust only the last paycheck of the Pay Period Leap Year.

As with the second option, employees receive the same total pay for the year. However, this option only works for some salaried, exempt employees, since the reduction for salaried, non-exempt employees, among others, could result in violations of the FLSA’s minimum wage rules or state minimum wage and wage payment laws. This option is fraught with legal danger, and gives employees a nasty surprise at the end of the year, even when you tell them now that this is the approach you plan to use.

In some cases, though, your option might be already selected by virtue of employment agreements, offer letters, or collective bargaining agreements. If those documents provide for a specific weekly or bi-weekly salary only and do not express wages in terms of an annual rate, then you likely have no choice to make: you must select the first option, even though this means employees receive an extra paycheck because of the Pay Period Leap Year.  If those documents express wages in terms of an annual salary only, then you need to choose one of the three options above.

If 2016 is a Pay Period Leap Year, plan now for how to handle it and notify employees as soon as possible. Due to the many variations in how payroll deposits work, the days of the week when employers issue payroll, and payroll processing around bank holidays, not every employer will face a Pay Period Leap Year in 2016.  Check now to ensure that you have your payroll schedule, benefit plans, and employee communications ready for the New Year.

Tomorrow, we’ll talk about a few ancillary issues with the Pay Period Leap Year.