Raise of hands: Who knew that 2015 has a possible 53 payroll deductions (if an employer pays weekly)? Since January 1, 2016 falls on a Friday, the pay cycle is pushed back to December 31, 2015, resulting in the possibility of 53 weekly deductions.
This rare event happens every eight to ten years. That’s not as often as a leap year, but you still need to have a plan in place so HR/Payroll and Benefits Administrators can execute on this anomaly. In general you have two decisions to make and relay to your HRIS vendors:
On the compensation side:
- The employer can pony up the extra compensation (at 3.7 percent more) OR
- The employer can divide an employee’s current salary by 27 periods and key it into the payroll system. Yes, employees will see less per paycheck. OR
- The employer could not pay employees for the last pay period. Yes, employees will probably notice this too!
Most companies choose option 1, as option 2 causes some morale issues and option 3 causes even bigger morale issues. (As a reminder, this happens every eight to ten years with a 3.7 percent average increase to payroll.) Employers need to weigh the pros and cons of their decision and relay that decision to their HR/Payroll vendor right away.
On the benefits side:
- You can keep deductions as is. If the employer has shared deductions being $X amount with employees, and then you take out one extra week, you have overdrawn the pay system and the employees have paid too much in benefits. OR
- Typically there are two months in the year with three pay periods. In 2015, there will be three months with three pay periods. Employers generally tell their payroll vendor to suspend benefit deductions for one pay period (except 401k, garnishments). We recommend you tell your vendor now what you have decided to do with regards to suspending third pay period deductions. We suggest to wait until 2015 year end to actually have the pay period deduction suspended (rather than earlier, in say, May) in case an employee leaves mid-year.
It’s also important to note that annual benefits under flexible spending accounts (FSA) and health savings accounts(HSA) – medical reimbursement programs – are capped by Federal Law. For employees contributing the maximum amount, this payroll period issue might impact payroll deductions into those programs as well.
Will you be affected by the extra week? What steps have you taken to prepare for this extra deduction? Have you notified your Payroll or HRIS vendor of your plan? If you have any questions about this 53rd week payroll deduction issue, please comment below or shoot me an email at HRTech@lockton.com.
Great post, thanks!
Using the dominator of 27 can mean an employee is being shorted a paycheck. Before I get into a few examples, let’s talk about why we have payroll leap year. As stated many times, because you are paid your annual salary in 364 days, you are actually paid an extra day every year (2 extra days during a real leap year). If you were employed by the same company for the last 11 years, you WILL receive an extra paycheck. It is very important to understand that this is not an extra paycheck in 2015, it is the sum of the additional days for the last 11 years.
Your HR department says that there are 27 pay periods in 2015; so they will divide your annual salary by 27. On the surface, this makes since, but when you understand where the 27th paycheck comes from, and you do the math, you will discover this is wrong.
Let’s look at someone who starts at a company on December 29, 2014 and the salary is supposed to be $52,000 per year. The first paycheck they receive will be on January 16, 2015 (They do not receive a paycheck on January 2, 2015). The last paycheck should be January 1, 2016, but that is a holiday, so they will receive a paycheck on December 31, 2015 (The end of the pay period is December 27, 2015). They will receive only 26 paychecks. So, you can see they worked from December 29, 2014 to December 27 2015. If the annual salary is divided by 26, they will receive $52,000. If the annual salary is divided by 27, they will receive $50, 074.07 ($1,925.93 short). You should also notice that they only worked 364 days. So, as stated earlier, they are paid for 1 extra day.
Someone may say that employees starting in 2015 are not subjected to the “divided by 27” method. Well then, if their pay is $2000 per week, then they will receive $52,000 which, as stated earlier, is correct. Now, let’s look at someone who started December 15, 2014. Their first paycheck is January 2, 2015. They will receive 27 paychecks in 2015. If we divide their annual salary by 27, they will also receive $52,000; the exact same amount as the person starting December 29, 2014. They do receive $52,000 for 2015, but what happened to the 2 weeks worked 2014? Because the first paycheck is in 2015, and they divide the annual salary by 27, the paycheck is lost.
If this person should not subjected to the divided by 27 policy either, then the person who starts December 1, 2014, will receive the same pay as the person starting December 15, 2014. You can take this back to as far as you want. The bottom line is that if you were not working for the company 11 years ago, you were not over paid 14 extra days and you will be shorted salary.
Any company who uses the divided by 27 policy is more than likely opening themselves up for a class action lawsuit.