Expert: Shirley McAllister, CPP, PHR - 2/22/2009

Question
We have paid employees on a bi-weekly basis. Due to cash flow we will be changing the method to semi-monthly.  My question is in March we would be getting three (3) paychecks under the bi-weekly schedule, e.g., March 2nd, March 16th & March 30th.  My employer does not want to pay the extra third paycheck but the employees have already worked two (2) weeks by February 28, 2009.  We will be paying on the 15th & 30th of the month.  In order to go to semi-monthly,  we would have to pay the three paychecks either in February (28th) or in March with the understanding that we are changing the payroll method. The employer wants to hold four (4) weeks until March 15th for payment.  Is this legal (pay now or pay later)?  It still comes the same amount of payroll and how much advance notice do we need to give the employees for changing the payroll method.  We know a lot of employees live from payroll to payroll.

Answer
You need to give at least 30 days notice before changing a pay period.  I know many companies have tried this and gone back to bi weekly. It is not all that different and does not save that much to cut out two payrolls a year.

If you have hourly employees it is difficult for payroll to calculate their wages and often your savings are lost on overtime pay for payroll.

No matter which pay period you use the hourly employees have to be paid overtime on all the hours they work over 40 in a week. A week is 7 consecutive days. So if 3 days are in one semi monthly pay period and 2 in the other  than payroll has to keep a spreadsheet or somehow track all the hours worked for the hourly employees for the three days work in the week in one payperiod over to the next, add in the two days worked and then calculate overtime. The overtime is then paid in the payperiod with the two days.

So if Joe works 26 hours in the first three days on the first semi monthly pay period and then on the second payperiod works 17 hours in those two days he works a total of 43 hours. He has been paid already 26 hours regular time in the first pay period. Now in the second he must be paid 40-26 is 14 hours regular time and 3 hours Overtime in the second pay period. Then if the week overlaps you have to start over with figuring the time.

This happens because on bi weeky the employees are paid for two pay periods of 40 hours. On semi monthly they are paid for 2 1/2 weeks.

Also the semi monthly rate is now figured on 86.66 hours instead of 80 hours. So you must take the annual rate subtract the total amount paid  already for the year and then divide the remaining pay periods by the amount left.

So if you start in March and Mary earns 50,000 annually. She has been paid 2 payments in Jan, 2 payments in February of 1923.07 (50,000 divided by 26). So 1923.07 x 2 is 3846.14. You need to subtract that from the 50,000 which is 45,153.86 and then divide that by the remaining pay periods for the year.  If you have 2 in March than there will be 20 more payperiods.  so 45,153.86 divided by 20 is 2,307.69 per pay period that will be paid the salaried employees for the remainder of the year. Next year you will divide the 50,000 by 24 and pay 2083.33 per pay period. This is sometimes difficult to explain to the salaried why they were earning 2307.69 and now they will earn 2083.33 but is because the first two months were paid under the 26 pay period rule and less was paid.

It is not easy to change and if you wish to keep your staff happy you will make sure that the impact is the least you can make it on their everyday living expenses. Holding over 4 weeks pay is not going to be good and I am not sure it is even legal because in many states you have to pay within a specified amount of time and 4 weeks is too long.

The most pay that should ever be held back is two weeks and than if there is hardship you would let them use vacation, PTO or loans payable back in installments to bridge the gap.

Shirley