Payroll is an essential function of every business. That being said, there are varying ways that employers can actually distribute pay to employees, and one critical decision that employers need to make when setting up payroll is what pay period they will use.
What exactly is a pay period?
A pay period is the recurring length of time over which an employee time is recorded and paid. Some common examples of pay period include weekly, bi-weekly, and monthly. The pay period used varies from employer to employer, for several reasons. Each employer needs to take the time to consider what pay period works best for them and their employees.
Types of Pay Periods
- Weekly: This pay period amounts to the employee receiving 52 paychecks a year. This pay period is most commonly used for hourly employees. Sometimes, employees being paid weekly are paid in arrears, meaning they submit timesheets at the end of a week, and are paid for those hours a week later.
- Biweekly: This pay period results in 26 paychecks per year, being paid every other week. This pay period can be slightly inconsistent, with some years actually having 27 paychecks. This pay period is used for both hourly and salaried employees. With a biweekly pay period, a day of pay is usually established, such as every other Friday. This pay period is the most popular, with 36.5 percent of U.S. private businesses paying their employees every 2 weeks, according to the Bureau of Labor Statistics. This is largely due to the fact that it is cheaper to run payroll every other week.
- Semimonthly: This pay period amounts to the employee receiving two paychecks each month, typically on the 15th and the 30th/31st of the month. This results in 24 paychecks per year. While a semimonthly pay period appears to be quite similar to a biweekly pay period, they are slightly different. Semimonthly paydays are more difficult to predict, as payday can fall on any day of the week.
- Monthly: This pay period amounts to 12 paychecks a year, once a month. This pay period is only used for salaried employees. This pay period is appealing to employers, as they only have to run payroll once a month. It is, however, not as favored among employees, who may feel the financial strain when they are only being paid once a month.
Factors to Consider When Choosing Pay Period:
- Laws and Regulations: While there is no federal law that dictates how often employers must pay employees, some states do have such rules in place. For this reason, the first step to settling on what pay period to use is checking what local and state laws apply.
- Cost and Time: Employers should consider how costly it is for them to run payroll, and rather it would be more cost-efficient for them to run payroll less often.
- Employees’ preference: Some employees may prefer to be paid more frequently. Hourly workers with lower pay, for example, may find waiting longer than two weeks for a paycheck to be a problem. Employers should take time to understand their employees’ unique financial circumstances and corresponding needs and possibly accommodate accordingly.
- Cost: When the pay cycle is less frequent, the cost of processing payroll goes down but there will be a greater outlay of cash as each employee’s check will be a greater amount.
Ultimately, it is up to each individual business owner to determine what pay period works best for their needs, and for the needs of their employees. That being said, there are some industry-specific trends with regards to pay period that may help inform an employer’s decision.
The construction industry, for example, displays the most uniformity in its pay period- 70.6% of businesses in the industry operate on a weekly pay period. Furthermore, over 50% of manufacturing businesses operate on a weekly pay period, and over 50% of businesses in the education and healthcare industries operate on a biweekly pay period. In terms of the correlation between pay period and employee pay, the semimonthly pay period is the pay period in which employees are paid the highest average hourly earnings, followed by closely by the monthly pay period. (Source)
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