Several factors should be considered when choosing a pay frequency, including legal requirements, your industry, employee classification and payroll administration costs.
1. Legal requirements
The Fair Labor Standards Act does not say how often employers must pay employees. However, according to the U.S. Department of Labor, “Wages required by the FLSA are due by the regular payday for the pay period covered.”
Many states have minimum payday laws, so make sure the pay frequency you have in mind does not conflict with state requirements. Also, some states have specific conditions for pay frequencies. For instance, the state-mandated pay frequency may depend on the type of work employees perform.
You can pay employees more often — but not less — than the state-required pay frequency. Further, you cannot change your pay frequency whenever you want. Courts have ruled that the change is allowed only if it’s for a legitimate business reason, is intended to be permanent, is not being done to escape paying wages and does not cause an unreasonable delay in the payment of wages.
In some states, employers must give advance written notice to employees who will experience a change in their pay frequency. Even if your state doesn’t have this requirement, it’s a good idea to provide the notice.
2. Your industry
From a competitive standpoint, it helps to know how often other businesses in your industry are paying their employees. For instance, if state law requires at least semimonthly payments, and most of your competitors are paying biweekly, weigh the pros and cons of both pay frequencies before making a choice.
You can obtain benchmarking data from government sources, employer associations or survey vendors. For example, per research by the Bureau of Labor Statistics, 70.6% of employees in construction are paid weekly, 52.9% in education and health services are paid biweekly, 35.9% in the information sector are paid semimonthly and 17.6% in financial activities are paid monthly.
3. Employee classification
Whether your employees are classified as exempt or nonexempt may impact your pay frequency decision-making. For instance, to simplify payroll calculations, some employers pay nonexempt hourly (overtime-eligible) employees weekly or biweekly and exempt salaried (not eligible for overtime) employees semimonthly. If your employees do not work overtime, it may be more practical to have a single pay frequency for everyone.
4. Payroll administration costs
A weekly pay frequency has 52 payrolls per year. Biweekly typically has 26 annual payrolls, semimonthly has 24 annual payrolls and monthly has 12 annual payrolls. The more frequently you run payroll, the higher your administration expenses. That said, it’s important to examine the entire picture when considering cost.
For example, although it’s cheaper to process payroll monthly, it’s not a desirable option for many workers. A monthly payroll may also cause issues with talent attraction and retention. On the other hand, processing payroll every week could take a toll on your budget or lead to financial waste.
The trick is to choose a pay frequency that is convenient for you and your employees and enables you to meet your payroll obligations. For help finding this balance, contact us today.