Non-Effect of 27 Payrolls in a Year

Opinion Paper: The Non-Effect of 27 Payrolls in a Year

Many businesses pay their employees on a biweekly basis, and payday falls on Thursday or Friday. In 2015 businesses that pay their employees on Thursday may have 27 payrolls, and employees paid on a weekly basis will receive 53 paychecks. In 2016 businesses that pay their employees on Friday may have 27 payrolls, and employees paid on a weekly basis will receive 53 paychecks. So many employers are asking the question: “Should we reduce the biweekly or weekly payroll for salaried employees to reflect the additional payroll?”

In my opinion the answer to that question should be a resounding No.

Employees that are paid on an hourly basis are not at issue here. The Fair Labor Standards Act requires that hourly employees be paid for all hours worked. But the basis for paying a salaried employee is often stated in annual terms. So employers feel that a salaried employee’s paycheck is determined by dividing the number of payrolls in a year into the employee’s annual salary. But that is not necessarily the case.

There are actually two types of salaried employees: (1) non-exempt, and (2) exempt. When a non-exempt employee is paid a salary, the employer and the employee must come to an understanding that the salary covers a fixed number of hours in each workweek. [29 CFR 778.113(a)] (See the article Calculating Salaries for Non-Exempt Employees.) So a non-exempt employee’s annual salary is actually calculated by multiplying the weekly salary by 52 weeks. The weekly salary is not calculated by dividing the annual salary by 52. The employee actually has a regular rate of pay that is calculated by dividing the number of hours normally worked each workweek into the weekly salary. And like all non-exempt employees, the salaried non-exempt employee must be paid for all hours worked.

So a non-exempt employee’s salary cannot be adjusted if there is an additional payroll in the year. But what about exempt employees.

The Code of Federal Regulations requires that exempt employees be paid a salary. [29 CFR 541.602] And the CFR specifies the basis on which the salary is to be paid. In paragraph (a) it states: "Subject to the exceptions provided below, the employee must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked." You will note that it states "for any week". The paragraph concludes by stating that an employee does not have to be paid "for any workweek in which he performs no work."

29 CFR 541.600(a) refers to salary basis of not less than $455 per week. Paragraph (b) states that an employer would be in compliance with the regulations if it paid less frequently (such as biweekly, semi-monthly, etc.), but all of the minimum salaries stated in the Code are multiples of the weekly minimum salary.

So an exempt employee's salary must have a weekly basis. That salary may be paid to the employee based on a different period (such as biweekly, monthly, etc.), but it is still based on a weekly salary. And that weekly salary cannot be reduced except for full day absences for personal reasons. But in order to calculate a full day's reduction in salary, an employer must know or be able to calculate the employee's weekly salary.

The issue of 27 payrolls in a year (or 53 weekly payrolls in a year) arises because many employees express the salaries of exempt employees in annual terms. So the assumption is that the employee is paid an annual salary and if there are additional payrolls, then the amount paid for each payroll might be reduced. But even if salaries are stated in annual terms, an employer must be able to calculate the employee's weekly salary, and the CFR does provide an indication on how to calculate the weekly salary.

In 29 CFR 778.113(b) it states that "where the salary covers a period longer than a workweek, such as a month, it must be reduced to its workweek equivalent." The method for doing so is to convert the employee's salary to annual terms and then divide by 52. If the employee is paid biweekly, the salary is multiplied by 26, if semimonthly by 24, and by 12 if monthly. So if the employee is paid a salary that is stated in annual terms, then the weekly salary is equivalent to the annual salary divided by 52. And that would be regardless of the number of actual number of paydays in the year.

When you start paying an employee on a biweekly basis, you calculate that biweekly salary by dividing his annual salary by 26. At that point the employer has, in effect, established the weekly salary which can be calculated by dividing the biweekly salary by 2. If that were to be adjusted because there were 27 payrolls in one year, the weekly salary would be reduced, so the employee is taking a cut in pay unless he works the full year.

Also keep in mind the fact that 26 payrolls would only cover 364 days. That means that the employee is not being paid for 1 day each year (2 days in a leap year). But then every 12 years there is an extra payroll that pays for the missing days.

I personally feel that we really have to get away from the idea that employees are really paid for a year's work. Employees are paid for each week that they work. Salaries may be stated in annual terms, but the reality is that the salary is actually paid based on a workweek.