FAQ: The Pay Period Leap Year Pitfalls

Recently, I heard from a reader who had a question about how the Pay Period Leap Year worked in practice. The reader had been shorted pay when they left a former employer’s job during a Pay Period Leap Year. Even though the employer made them whole, the reader wondered why this happened. Their question raised a good point about the potential pitfalls of taking Option 2 from my earlier post.

To recap from my post earlier this year, the Pay Period Leap Year doesn’t really exist. It’s just the phrase I’ve coined to explain a phenomenon that is critically important for large employers or employers with largely salaried workforces, in particular, because (1) it can have a substantial impact on your bottom line and (2) it only happens roughly once per decade. What is a “Pay Period Leap Year”? Put simply, Pay Period Leap Years are years with an extra payroll period. 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, just as we did in 2020.  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.  2021 has 53 Fridays which means that, for many employers, 2021 will be a Pay Period Leap Year (if you didn’t already celebrate one in 2020).

Option 2 in my post discussed an employer dividing a total annual salary by 53 (or 27) pay periods rather than 52 (or 26). This is an attractive option for employers because it is revenue neutral.

Does the math work? YES!

The first question the reader had was whether the math really worked if an employer chose Option 2 from my original post. They assumed that there was a math error inherent in Option 2 that could have explained why their pay was shorted. I can assure you that the math works, though.

For instance, let’s assume you pay your employee $52,000 per year on a bi-weekly basis.  You would pay $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 a Pay Period Leap Year (a year in which you pay employees 27 times), you would pay $53,000 over 53 weekly pay periods (a 2% raise) or $54,000 over 27 bi-weekly pay periods (a 4% raise).  If you choose “Option 2” from my original post, you would pay a $52,000/year employee either $981.14 per week or $1925.93 every two weeks.  $981.14×53=52,000.42.  $1925.93*27=$52,000.11.  You won’t have shorted your employee.

If you want to stretch it over several years, it still works (again, let’s assume 2021 is your Pay Period Leap Year):

2020: 26 payments of $2,000
2021: 27 payments of $1925.93
2022: 26 payments of $2,000

In each case, your employee gets paid $52,000 for the year.

Does being paid in arrears change things? NO!

Most employers pay in arrears, not in the current period. In other words, payroll for this week is either for the previous week or the two previous weeks. However, the payment in arrears only impacts the final paycheck after your employee leaves the job.

Just to keep things simple, let’s give your employee a start date of December 18, 2019 so we get exactly 2 weeks in 2019, one of which we can pay out in 2019, one of which will pay out in 2020.  Eventually, the employee is going to leave the job.  For simplicity’s sake, let’s assume 2021 is the Pay Period Leap Year and that the employee leaves at the end of the following year on December 31, 2022. How does this change things? Only at the end:

2019: 1 payment of $1,000 (December 18-25 of 2019, paid in December 2019)
2020: 26 payments of $2,000 (including 1 week of 2019)
2021: 27 payments of $1925.93 (including 1 week of 2020)
2022: 26 payments of $2,000 (including 1 week of 2021)
2023: 1 payment of $1,000 for the arrears (1 week of 2022)

In our example, the employee worked 3 years and 2 weeks total, so we would expect them to get paid $52,000+$52,000+$52,000+$2,000, a total of $158,000.  With a 2021 “Pay Period Leap Year,” the employee would get paid $158,000.11.  Again, you do not short the employee. (Eagle-eyed readers will notice that we did shift some of the income reported on the employee’s W-2 into a different year. That happened because you paid in arrears and the employee’s last day happened to coincide with the end of a tax year. The total pay didn’t change.)

If you want to make this calculation 2 weeks in arrears, feel free:

2019: 0 payments (December 18-31 of 2019, NOT PAID IN 2019)
2020: 26 payments of $2,000 (including 2 weeks of 2019)
2021: 27 payments of $1925.93 (including 2 weeks of 2020)
2022: 26 payments of $2,000 (including 2 weeks of 2021)
2023: 1 payment of $2,000 for the arrears (2 weeks of 2022)

The only change is in the size of the final paycheck. The further in arrears you pay, the bigger that final paycheck will be.

Employer Takeaways: Watch for Pay Period Leap Year Pitfalls

As I mentioned at the outset, the reader was underpaid and their company did have to pay them back pay, but not because the Pay Period Leap Year math did not work. The employer fell into one of the Pay Period Leap Year pitfalls.

Pitfall 1: Paying employees a weekly or bi-weekly salary

In our examples, the employer pays an annual salary divided weekly or bi-weekly. If your offers to employees include only a weekly or bi-weekly salary (“Your wages will be $1,000 per week.” or “We will pay you a bi-weekly salary of $2,000.”), then there is no “Pay Period Leap Year.” You simply pay that weekly or bi-weekly salary every pay period. In Pay Period Leap Years (years with 53 or 27 pay periods), that will mean paying more. By expressing pay in terms of weekly or bi-weekly periods only, you have by default chosen Option 1 from my original post and cannot choose Option 2 to keep the dollar cost the same.

Pitfall 2: Your Employee Leaves Employment During a Pay Period Leap Year

Let’s change up our example scenario. Instead of leaving at the end of or after a Pay Period Leap Year, what happens when your salaried employee leaves in the middle of a Pay Period Leap Year? If that happens, you must adjust your final paycheck to account for this. You might start the year assuming that the annual salary gets divided up over 53 or 27 periods, but if an employee leaves in the middle of the year, you no longer have 53 or 27 pay periods to divide their salary over. You must then re-adjust your calculations and pay more in that final paycheck! Let’s do the calculation with an employee leaving on June 30 in what would otherwise be a Pay Period Leap Year:

2019: 0 payments (December 18-31 of 2019, NOT PAID IN 2019)
2020: 26 payments of $2,000 (including 2 weeks of 2019)
2021 (a Pay Period Leap Year): 13 payments of $1925.93 (last day is June 30, first payroll includes 2 weeks of 2020)
2021 final paycheck: $2,962.91

How do we get to that higher final paycheck? You can break it down into $2,000.00 and $962.91. You can think of the $2,000 as either (1) the last 2 weeks of 2019 or (2) the corrected amount for 2 weeks of pay in 2020 because it is NO LONGER a Pay Period Leap Year (your employee left after 13 pay periods). The $962.91 is the arrearage, or explained another way, the difference between what you actually paid during 2021 through the June 30 termination date and the $26,000 you must pay for 1/2 year of that example $52,000 salary. Essentially, if you have chosen Option 2 from my original post, then you must go back and convert to a NON Pay Period Leap Year whenever a salaried, exempt employee in a “Leap Year” departs during that year. Again, in this example, your employee did not have 27 pay periods, but 13.

This is the pitfall the reader’s company fell into. In the end, they got the math right when the employee pointed it out and they made the employee whole.

Pitfall 3: Trying to use the Pay Period Leap Year for other pay types

The Pay Period Leap Year is only an issue for salaried, exempt employees paid an annual salary divided over 26 or 52 pay periods. If you pay employees a piece rate, a weekly/bi-weekly rate, a daily rate/per diem, or by the hour, then the Pay Period Leap Year does not apply! There can be no Pay Period Leap Year if you are paying per piece/week/day/hour. In those scenarios, you are paying employees for how much they work within a pay period, not for simply being employed during a year. You can’t arbitrarily cut pay for workers in these pay categories based on the number of pay periods in a year.