Frequency of Payment

Frequency of Payment

The frequency of payment to employees covers two areas: the number of days over which pay is accumulated before being paid out and the number of days subsequent to this period before payment is physically made.

Organizations with a large proportion of employees who are relatively transient or who are at very low pay levels usually pay once a week, since their staffs do not have sufficient funds to make it until the next pay period. If these businesses attempt to lengthen the pay period, they usually find that they become a bank to their employees, constantly issuing advances. Consequently, the effort required to issue and track advances offsets the labor savings from calculating and issuing fewer payrolls per month.

The most common pay periods are either biweekly (once every two weeks) or semimonthly (twice a month). The semimonthly approach requires 24 payrolls per year, as opposed to the 26 that must be calculated for biweekly payrolls, so there is not much labor difference between the two time periods. However, it is much easier from an accounting perspective to use the semimonthly approach, because the information recorded over two payrolls exactly corresponds to the monthly reporting period, so there are fewer accruals to calculate. Offsetting this advantage is the slight difference between the number of days covered by a semimonthly reporting period and the standard one-week time sheet reporting system. For example, a semimonthly payroll period covers 15 days, whereas the standard seven-day time cards used by employees mean that only 14 days of time card information is available to include in the payroll. The usual result is that employees are paid for two weeks of work in each semimonthly payroll, except for one payroll every three months, in which a third week is also paid that catches up the timing difference between the time card system and the payroll system.

A monthly pay period is the least common, since it is difficult for low-pay workers to wait so long to be paid. However, it can be useful in cases where employees are highly compensated and can tolerate the long wait. Because there are only 12 payrolls per year, this is highly efficient from the accounting perspective. One downside is that any error in a payroll must usually be rectified with a manual payment, since it is such a long wait before the adjustment can be made to the next regular payroll.

The other pay frequency issue is how long a company can wait after a pay period is completed before it can issue pay to its employees. A delay of several days is usually necessary to compile time cards, verify totals, correct errors, calculate withholdings, and generate checks. If a company outsources its payroll, there may be additional delays built into the process, due to the payroll input dates mandated by the supplier. A typical time frame during which a pay delay occurs is three days to a week. The duration of this interval is frequently mandated by state law; it is summarized in Exhibit 9.1.