One of the challenges businesses face when they first start hiring and paying employees is to understand the multitude of concepts and terms that exist around payroll. Being able to distinguish between key concepts like payday, pay period, and payroll cycle is vital to ensure a smooth payroll process and timely payments.
Businesses working with payroll software have probably come across the term ‘payroll cycle’ on more than one occasion. But what exactly is a payroll cycle? What are the different payroll cycle types? And what factors do employers have to consider when choosing a pay cycle?
The payroll cycle, sometimes also called pay cycle, is the time that passes between two payroll runs. In other words, it’s the time span between two consecutive paydays. For example, if a business pays its employees on a weekly basis, every new 7-day period represents a new payroll cycle. Although closely linked, the payroll cycle is not to be confused with the pay period, which is the period of time for which employees are paid.
Some articles also define the payroll cycle as the sum of activities that businesses need to undertake during payroll processing, since the cycle covers the entire period from one payroll to the next.
For a detailed overview of the different payroll cycle activities, check out this article of the Lano Payroll Academy where we guide you through the different stages of processing payroll.
The payroll cycle length can be anything between a week and a month. The most common payroll cycle types are weekly, bi-weekly (every two weeks), semi-monthly (twice a month) and monthly. On a global scale, the most common pay cycle is a monthly payroll, but there are differences between countries.
While employees in most countries in the EMEA and APAC regions are paid on a monthly basis, employers in the United States, Canada and Mexico often opt for a semi-monthly or weekly payroll cycle. Bi-weekly payroll is common in certain industries in the U.S. such as healthcare and hospitality.
There are various factors businesses need to take into consideration when choosing a payroll cycle. These factors include:
Legal requirements: In many countries, there are legal regulations concerning how often employers have to pay their employees. Often, the law mandates paying employees at least once a month.
Cash flow of the business: Before a business can pay its employees, the money needs to be available first.
Industry standards: If it’s common to pay employees in a certain industry on a weekly basis, businesses opting for a monthly payroll cycle put themselves at a disadvantage, since employees usually prefer shorter pay cycles.
Administrative workload: When given the choice, businesses typically choose longer payroll cycles, since it allows them to reduce the workload they have to spend on processing payroll.
When talking about payroll cycle types, people usually refer to the frequency with which employees are paid (i.e. weekly, monthly, etc.). But payroll cycles can also be classified according to when the payment to the employee is issued.
When wages and salaries are paid in full on the employee’s official payday as usual, we have what is called a normal or regular payroll cycle. Additional payments issued to employees outside the normal payroll run, on the other hand, are called off-cycle payments.
Off-cycle payroll becomes necessary when there are additional payments to be made to the employee that cannot be pushed to the next regular pay date.
With off-cycle payroll and regular payroll, we’ve already come across an additional way to categorize payroll cycles. However, there is another type of payroll cycle businesses should be familiar with, which is the final payroll cycle.
The final payroll cycle is the one that calculates an employee’s final pay. It follows specific rules as to what pay elements to include (accrued PTO, bonuses, etc.) and until when the employee’s last paycheck has to be issued—depending on the law, immediate payment might be required.
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.
BECOME A PARTNER
© Lano Software GmbH 2024