In this podcast episode, we talk about optimizing the use of payroll cycles, and point out a legal issue that can interfere with one of the more common payroll cycles. Key points are noted below.

The Nature of a Payroll Cycle

A payroll cycle is the length of time between payrolls. If you pay people once a week, then you have 52 payroll cycles per year. Usually, it takes about the same amount of time to complete a one-week payroll cycle as it does for any longer period of time. So, for example, if you pay people once a month, you only have 12 payroll cycles per year, which means that you expend about ¼ of the annual effort that you would if you had weekly payroll cycles.

Payroll Cycle Choices

Obviously, it makes a great of sense to have longer payroll cycles than once a week. You could go with the example I just gave and pay employees once a month, but that can be really difficult for anyone living from paycheck to paycheck. So, that pretty much leaves you with two alternatives, which is either every two weeks or semi-monthly. Semi-monthly means that you pay on the 15th and last days of the month.

If you use a two-week cycle, then there are 26 cycles per year, versus 24 cycles if you use a semi-monthly cycle. If you select a two-week cycle over a semi-monthly cycle, that requires about 8% more effort. If that were the only criterion, then most people would pick a semi-monthly payroll cycle.

But not so fast. There are two more issues to consider. Once is, that if you use a two-week cycle, employees get used to the idea of generally receiving two paychecks per month – so when they get an extra paycheck two times per year, they really like that. It’s a subtle point, but employees generally prefer a two-week cycle to a semi-monthly cycle.

Illegal Payment Intervals

Let’s say that you’re using a semi-monthly payroll, so your last payroll of the month falls on the 30th day. This day happens to fall on a Wednesday – so you’re paying employees on that Wednesday. Your payroll service provider needs to process payroll three days in advance, so you have to submit the payroll the previous Friday.

However, most timekeeping systems are based on weekly time reporting, so your payroll administrator logically enforces a cutoff as of the preceding weekend. After that weekend, any hours worked will fall into the next payroll cycle. What this means is that there’ll be a gap of eight pay days before employees are paid.

Guess what. In seven states, it’s illegal to wait that long. You cannot make employees wait more than 5 days in Arizona, or 6 days in Massachusetts and Vermont, or 7 days in Delaware, Hawaii, New York, and Washington.

If you’re an international listener, then check your local government rules. There might be a similar restriction.

This is a real problem if you have a semi-monthly cycle. Even if you live in one of the other states that allows a longer delay, you might someday have employees in one of those states, possibly through an acquisition. Also, if your company has a union, check the union contract – it might have the same kind of restriction.

Parting Thoughts

So where does this leave us? If you look at all of the issues impacting a payroll cycle, the two week cycle is the best combination of efficiency and ability to meet the labor laws.

And in case you think I follow my own advice, I impose a semi-monthly cycle on every company we acquire. I just keep a close eye on how long it takes to issue a payroll after timekeeping periods have closed.