Processing payroll requires employers to fully understand all the different concepts linked to calculating and paying employee salaries and wages. In the previous chapter of the Lano Payroll Academy, we’ve shed some light on the different types of payroll cycles and already mentioned another important term when it comes to payroll, the pay period.
Pay period and payroll cycle are closely linked to one another, but they’re still two separate concepts. Read on as we explain what a pay period is, how it differs from the payroll cycle and other payroll-related concepts, and what employers need to consider when choosing a pay period.
A pay period is the period of time for which employees are paid. In other words, the pay period is the stretch of time between two payroll runs, during which employees accrue earnings. The term is often used interchangeably with payroll frequency or payroll period.
The length of the pay period depends on the pay frequency chosen by the employer, which can be weekly, monthly or any other legally accepted payroll frequency. For instance, if an employer pays his or her employees once a week, the pay period could start on Saturday and end on Friday, or start on Tuesday and end on Monday.
The pay period also determines when your company issues wage payments. This is often the last business day of a month, but the pay period can also be concluded on the 15th of the month.
The pay period is one of several payroll-related concepts which often get mixed up. For instance, the terms ‘pay cycle’ and ‘pay period’ are often used almost interchangeably although they are technically not the same.
The payroll cycle is the length of time between two consecutive payrolls and basically describes how often a business processes its payroll. While it’s true that the length of the pay period determines the payroll cycle—a weekly pay period results in a weekly payroll cycle—and that their value (i.e. weekly, semi-monthly, etc.) is the same, it’s important to remember that the pay period is the exact date range for which wages and salaries are calculated.
For example, the specific pay period for which employees are paid could be January 15 to January 28, followed by January 29 to February 11. The length of the pay period remains the same, as does the payroll cycle, but the date range that has to be taken into consideration when calculating employee pay constantly changes, which is why many businesses use a detailed pay period calendar.
The pay period is also not to be confused with the pay date. While the pay period is the length of time during which the employee works to earn the salary/wages paid with his or her next paycheck, the pay date marks the day on which the calculated payroll liabilities have to be paid, including payroll taxes as well as salaries and wages. The payday often falls on the same day as the pay period end date, but doesn’t have to.
There are different types of pay periods, and each one holds its own benefits. Here are the most commonly applied pay periods.
Daily pay periods are not that common, as they are very time-consuming and make it difficult to calculate gross and net pay. However, there are some companies who allow their employees to choose this option, as there are more and more automated payroll systems that support daily pay periods. Some of them charge a small transaction fee to the employee if they opt for a daily payment.
In addition to that, daily payments can be an attractive incentive for employees who are in need of a more flexible access to their wages, e.g. to pay for unforeseen medical bills or other expenses.
Pro: Quick access to funds can be a good incentive for employees
Con: Time-consuming process; often comes with a transaction fee
Weekly pay periods are more commonly used by companies. Since they often reflect the same payment period for your employee’s fixed cost such as rent or utilities bills, this option is quite popular with workers around the globe. On top of that, weekly pay periods allow for an easy calculation and management of potential overtime and other bonus payments.
On the other hand, weekly pay periods are quite time-intensive for your HR managers and may incur expensive fees when handled by a software that charges for every transaction.
Pro: Popular option for employees; easy management of overtime and other bonus payments
Con: Quite time-consuming; might lead to expensive processing fees
A bi-weekly pay period sees employees receiving their pay on the same day of every second week. This is quite popular among employees, as they have a consistent flow of pay. It’s also easier to calculate overtime and bonuses such as holiday leave and sick time when choosing this option.
But bi-weekly pay periods also come with some downsides, especially when thinking of the bookkeeping process. Given the different structures of each month, it may happen that some months have three instead of just two payments scheduled in. For example, this might be the case in September 2023 if the payments are issued on Fridays, as there are 5 Fridays in that month that year. This may pose some challenges for your bookkeeping team, and might even affect projected cash flow for salary payments.
Pro: Consistent payment flow for employees; easy management of overtime and other bonus payments
Con: Complex bookkeeping process for months with more than 2 pay periods
Even though they might seem alike at first glance, bi-weekly and semi-monthly pay periods are not the same. Semi-monthly pay periods refer to payments being issued twice a month on a set date, e.g. the 1st and the 15th, or the 15th and the last of the month.
If one of these predetermined dates falls on a weekend, they are usually brought forward to the Friday before, or might be pushed to the Monday—or next business day in case of a public holiday. However, these exceptions might cause an issue for payroll systems, as it makes it harder to calculate work weeks and align them with the actual pay period.
Pro: Consistent payments on predetermined dates
Con: Potential administrative complexity due to weekends or holidays
Monthly payments are very common in smaller businesses, as they incur the least amount of administrative efforts out of our list so far and therefore also keep fees low and cash flow high for the company itself.
But that also means that employees have less financial flexibility when it comes to paying their bills, and often have to wait long periods to receive their pay. So choosing a monthly pay period might be less attractive to new talent and potentially make it harder to find the right employees for your business.
Pro: High cash flow for the business; low administrative effort
Con: Low financial flexibility for employees; potentially less attractive to new hires
Finally, some businesses may choose an individual pay period, e.g. based on certain project deadlines. Another case for individually determined pay periods would be the resignation of an employee or the termination of a contract, which calls for an out-of-line pay cycle to be used.
Individual pay periods can be a great way to keep your businesses cash flow high while rewarding employees whenever a project has come to an end, but they will likely also lead to additional fees being charged for non-scheduled payments.
Pro: Pay employees on a project-base; keep cash flow high
Con: Additional charges may apply for one-off payments
The number of pay periods per year depends on the chosen pay period type. While paying employees on a weekly basis means that there are 52 pay periods in a year, bi-weekly pay results in 26 (or 27, depending on the calendar year) pay periods. Under a semi-monthly pay schedule, businesses have to process payroll for 24 pay periods over the course of the year, and monthly pay obviously leads to 12 pay periods per annum.
When determining how often to pay employees, businesses have to think about more than their own preferences. Sure, the chosen pay frequency should work well with the business’s workflow, but there are several other aspects to consider when choosing a pay period, including:
Employment laws: Employment laws often stipulate a minimum pay frequency employers must adhere to. In many countries, the minimum requirement is to pay employees once a month.
Salary type: Employees with certain salary types (e.g. hourly or commission-based pay) are used to shorter pay periods (e.g. weekly or bi-weekly), while employees with a fixed salary are used to receiving their paycheck once a month.
Workload for the HR, payroll and accounting departments: The shorter the pay period, the more often a business has to process payroll, which increases the workload of the HR, payroll, and/or accounting teams.
Employee financial wellbeing: Employees have different financial obligations and might prefer different payroll frequencies. Businesses should therefore also consider employee needs to guarantee their financial wellbeing.
In addition, businesses should think carefully about the respective pros and cons of each pay period type as outlined above. Here is a detailed overview to help you decide.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
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