Now that payroll teams are over the hump of closing out last year and have some takeaways from that process, it's a great time to apply what's been learned and explore ideas on how to continuously improve. One great place to do this is looking at ideas for changing your pay cycle frequency. While this may appear to be a difficult task, there are some key items to consider that can help payroll professionals ease the burden, gain efficiency, and ensure results that engage your people when preparing for and executing on a change in your pay cycle frequency.
1. Determine why you need to change pay cycles
This might sound obvious but knowing the answer to this question can help payroll professionals manage the change more effectively and craft a clear message to your employees.
Companies change their pay cycle frequency for many reasons. For most it comes down to cost savings, however, there are other reasons such as: complying with state, federal, and local laws, changes to job titles, job duties, and responsibilities, implementing fair and consistent payroll calculations, management of employee changes and requests, culture demands, mergers and acquisitions, to ease the administrative burden on payroll professionals, and more.
Once you determine the reason the business needs to make the change, you'll be better able to identify the frequency of pay cycle that would make sense for your organization.
2. Identify your new pay cycle and the impacts it will have
Whatever your reason for making the change, you will need to define your new pay cycle frequency up-front so you can clearly lay out its benefits and the steps needed to get there. Below are examples of different pay cycle frequencies and some highlights of the benefits and impacts that come with each:
- Weekly pay cycles consist of 52 pay periods each calendar year. They work well for hourly workers because overtime is easy to manage and calculate. While this frequency is most attractive for employees, it is the most time consuming for payroll professionals and the most expensive for organizations.
- Bi-weekly pay cycles consist of 26 pay periods per calendar year. This pay cycle works well for both hourly and salaried employees. Overtime is still easy to manage and calculate. This pay cycle is most attractive for payroll professionals because they are better able to manage the payroll process. While this pay cycle does present some cost savings over weekly cycles, it is still a higher cost to the organization
- Semi-monthly or bi-monthly pay cycles consist of 24 pay cycles per calendar year. Most organizations pay on the 1st and the 15th of the month or the 15th and the last day of the month. Overtime can be difficult to manage and calculate. However, this pay cycle reduces the administrative burden for payroll professionals, accounting departments, and is less expensive to the organization.
- Monthly pay cycles consist of 12 pay periods per calendar year. This pay cycle is rare with hourly employees and works better for salaried workers. Overtime is much more difficult to manage and calculate. It does, however, significantly reduce the administrative burden for payroll professionals, accounting departments, and is the lowest cost to the organization.
Of course, understanding the different pay cycle options is only half the battle. You also have to make sure the choice you go with follows the compliance standards your organization needs to align with.
3. Check compliance
The fact that there are compliance impacts when you change pay cycles shouldn't be a surprise, but there are a few important things you should know to make sure you're matching your strategy up to the regulatory requirements your organization must follow:
- Know your federal, state, and local laws as it relates to payday requirements. Check the state provisions on the state department of labor website to ensure you're prepared.
- Know how your pay cycle change will impact overtime. Check the Fair Labor Standards Act (FLSA) regulations to ensure that identify employees who are classified as nonexempt and paid overtime requirements.
- Know any employment contracts, collective bargaining agreements, and union contracts that clearly define rules related to payday requirements.
With compliance verified, you'll be able to push forward with the exciting part of the pay cycle evaluation — actually making your proposed changes.
4. Pick your conversion date
When picking your conversion date, it's important to determine what is best for the business and your employees. One way to go about this is to look at your current payroll calendar and identify if there are any common pay period start dates from your old frequency that align with your new frequency. If you choose this date, it can eliminate some of the gaps in an employee’s paycheck.
If you cannot align your new frequency with your old frequency, you may need to make some adjustments with your employees' pay. This may include cutting an additional check if you owe employees for hours worked between the frequency change or offering additional pay options (like a bonus or a loan) for advanced hours when an employee is shorted days in the frequency change. These are just a few examples, and each company will need to determine what is best for your organization. But as all payroll pros know, getting pay right is one of the most important factors in establishing trust with your people so make sure your solution to this cutover gets clearly communicated.
5. Ensure your payroll system is ready
One of the most critical steps in changing pay cycle frequencies is conducting a review of your current payroll solution. This will help you prepare for adjustments that need to be made and ensure that your employees’ paychecks are accurate. There are several areas that need to be addressed when preparing your payroll system for a frequency change:
- Accruals: Check how the change will impact time-off accruals. Recalculate vacation, sick, or personal leave accrual rates based on your new pay period.
- Calculations: Check how the change will impact any calculations. Recalculate overtime premiums, weekend pay, special pay, etc.
- Deductions: Check how the change will impact employee deductions. You will need to check involuntary deductions like taxes, Social Security, Medicare, state/local income tax, any wage garnishments like child support, student loans, etc. In addition, you will need to check voluntary deductions like insurance premiums, retirement plans, commuter benefits, job-related expenses, housing expenses, and other relevant areas. Keep in mind that these amounts may be increased or decreased depending on how often you run payroll. Once you have reviewed your deductions, you will need to communicate changes to the appropriate agency and ensure the system is setup accordingly.
- Compensation: Check how the change will impact employee compensation, bonuses, and other allowance plans. Make any necessary adjustments to accommodate for the new frequency.
- Payments: Make any necessary adjustments to autopay, direct deposit, and pay cards. This will need to be communicated to appropriate vendors.
- Reporting: Identify any adjustments that will need to be made to reporting for internal and external use. This may include things like changes to calculations, reporting dates, changes to GL, etc.
- Integrations: Evaluate your integration points to other software applications and/or vendors. Make updates and test those integrations.
Having resources available and planning a testing phase is an important part of ensuring that your payroll system is ready for your new frequency.
6. Communicate with employees
Communication is the key to success when it comes to making a change to your pay cycle frequency. It's important that you are giving your employees advanced notice to any changes impacting their pay. Communicating as early as possible will help them better prepare personally for the changes to their paycheck. Here are a couple things to consider when communicating frequency changes to your employees:
- Have clear, easy-to-understand communication strategies, channels, and processes in place. Having multiple methods of communication is a great way to get the message out and educate your people on what is changing, why it's changing, and what they need to know. A combination of different options like a payroll frequency change notice in your payroll solution, personal emails, companywide bulletins, in-person or remote training, text messages, and phone calls will maximize your chance of reaching and preparing the majority of your employees.
- Develop a service delivery model. This should include how employees can access resources, get answers to questions, or address any concerns about the change.
Conclusion: Make your case for change
Changing your pay cycle frequency is a big undertaking that requires good communication and collaboration across the company. If you're considering making a change to your pay cycle frequency, ensure that you have a solid strategy in place that can help streamline the transition. A reliable payroll solution can help payroll professionals gain efficiency through the change process and help your people gain confidence in their pay information.
Of course, to get there you've got to convince the right stakeholders and leaders at your business to buy into the change. If you need some ideas there, we've got a great ebook on executive communication that can put you on the right track to getting what you and your people need to succeed.