Don’t Get Carried Away with the Pay Period Leap Year

Yesterday, we discussed the Pay Period Leap Year and what it means for employers. If your first weekly paychecks would normally issue this Friday, January 1, 2016, you will have a fifty-third pay period on December 31, 2015. If your first bi-weekly paychecks will issue on Friday, January 1, 2016, you will have a twenty-seventh pay period on December 31, 2015, depending on bank holiday payroll processing rules. This means that for employers who pay employees weekly or bi-weekly, 2016 likely is a rare Pay Period Leap Year.

I outlined three options for handling Pay Period Leap Years if you pay employees on a weekly or bi-weekly basis:

1. Pay the same amount in each pay period as you did in the non-Pay Period Leap Year.Under Option 1, employees will receive an effective increase of approximately 2% (weekly pay periods) or 4% (bi-weekly pay periods).
2. Divide the total salary by 53 (or 27) pay periods rather than 52 (or 26). This ensures that employees get the same compensation as in non-Pay Period Leap Years, but it also means employees would get slightly less with each paycheck during the year.
3. Adjust only the last paycheck of the year.

Regardless of the option you choose, there’s one important reminder: Not all of your employees will have a Pay Period Leap Year.  This is relevant if you choose Options 2 or 3 above.

Under Option 2 (or 3, for that matter), while the majority of your employees will leap in a Pay Period Leap Year, not all of your employees will because some of them might not have 27 pay periods!  For example, assume that you hire Emma on your company on January 1, 2016.  Your offer letter provides a $100,000 annual salary for Emma paid in bi-weekly increments.  Per your standard payroll policy, you pay in arrears.

Should you tell Emma that you will divide her annual salary into 27 bi-weekly payments this year because my Pay Period Leap Year post says so?  No!  You would inadvertently short by $3,703.70 in 2016.  Why?  Like nearly all employers, you pay in arrears. That means that payday #1 on January 1, 2016 is actually pay for time worked in 2015.  Because Emma started on January 1, 2016, she was not working in December 2014, and she would not get a paycheck on January 1, 2016 (her first day of work). That leaves Emma just 26 paydays left in the year.  With only 26 paydays (and pay periods) and an annual salary divided into 27 parts, Emma isn’t getting $100,000 this year.  In fact, she’ll end up with $94,973.54 on her W-2. That’s $5,026.46 short of the $100,000 that you agreed to pay Emma in your offer letter, which is a potential problem.

If you ever took an accounting or bookkeeping class, you might be tempted to conclude that this is just a cash versus accrual problem that only shows up on a W-2, and that Emma will make up the roughly $5,000 difference with her first paycheck in January 2017. Except that she doesn’t. To simplify things, let’s assume that Emma works for exactly one year, leaving after December 31, 2016. Her first paycheck in 2017 will cover the last 5 days of 2016…only $1,322.75, which does not make up for the shortfall. Emma is still $3,703.71 short of her 2016 compensation, even if you look at it on an accrual basis. In fact, she’s short exactly one paycheck, which you would expect because you made Emma “leap” by dividing her salary by 27 paychecks when, owing to her start date, she would only receive 26 of them in 2016.

Upshot for Employers

Don’t get carried away by the excitement of a Pay Period Leap Year.  Due to the various days and ways that bi-weekly paychecks in particular are paid and calculated, not every employer will face a Pay Period Leap Year this year. Some may have experienced it in 2015, and others might not see it for a few more years yet.

If 2016 is a Pay Period Leap Year do two things:

1. Look at every individual employee to determine whether they will really receive 27 paychecks before you selection Options 2 or 3 above. Not every employee will have a Pay Period Leap Year, including those who start on or after January 1 of the Pay Period Leap Year (among others).
2. Notify employees as soon as possible how you plan to handle it.

Speaking of new years and leap years, I’ll be back on January 4 with a recap of wage and hour lawsuits in 2015.  Enjoy the holiday and I’ll see you next year!