What is Pay Period?

What is pay period?

A payroll system is one of the key pillars of HRIS at every company. When setting up a payroll system, one of the initial tasks is deciding the frequency with which employees are paid. A pay period is effectively the frequency with which your employees are paid. The dictionary would define pay period as:

‘A pay period is a re-occurring schedule which determines how often your employees will be paid.’

Establishing a pay period is a critical for ensuring your business runs smoothly. It makes sure that your employees are paid on a timely basis for their work and helps to simplify taxes, expenses and more general finances. There often isn’t a one size all fit model for determining the frequency of pay. You can set up different pay periods dependent on the different classification of employees, i.e. salary vs. wage, part-time, flexi work and so on.

There are different types of pay period and it’s likely that you already know about them. If not, read below as we’ve got a short definition of each:

Types of Pay Period

Weekly Pay Period

If your employee is on a weekly pay period, it means they will receive 52 pay checks a year. Hourly and part-time employees are usually paid using weekly pay period.

Bi-Weekly Pay Period

Alternatively called fortnightly or every other week, employees who are on a bi-weekly pay period receive 26 pay checks annually. Employees on bi-weekly pay period can be hourly or salaried.

Semi-monthly pay period

Very similar to a bi-weekly pay period, an employee who is on a semi-monthly pay period receives two pay checks a month, which converts to 24 pay checks a year. It is common for salaried employees to be paid on a semi-monthly basis.

Monthly Pay Period

Employees receive 12 pay checks annually. Monthly pay period employees are almost always salaried employees.

What are the benefits and costs of each type of pay period?

There are benefits and drawbacks associated with each type of pay period and its up for you to decide what you think best fits your organization and each classification of employee in your organization.

Weekly Pay Period

• Benefits

  • Employees are paid more often, so they have a constant flow of liquid assets.
  • Management and HR can sort out any pay-roll issues very quickly and during business hours.
  • Payment is more flexible, so any issues are resolved quicker.

• Drawbacks

  • Most time-consuming pay period method in terms of administration.
  • Least efficient in terms of tax and accruals for employees.
  • More frequent payroll results in greater expenses for the organization.

Bi-Weekly Pay Period

• Benefits

  • Employees are paid often.
  • Management and HR can sort out any pay-roll issues very quickly and during business hours.
  • More time/cost efficient for the organization compared to weekly pay.

• Drawbacks

  • HR Administrator have to pay attention to pay dates, so they can accurately process them on the payroll schedule.
  • Pay periods can be slightly difficult if the period overlaps over the end of a month or year, thus requiring additional calculation.
  • Leap years can cause processing difficulties.
  • If a pay check extends over the end of the year (a potential 27 pay check), this causes difficulties with regard to annual pay expectations, employer contributions, benefits and tax.

Semi-Monthly Pay Period

• Benefits

  • Employees are paid relatively frequently.
  • Employee pay checks are always paid within a month, which removes the complex intricacies involved with a bi-weekly pay period.
  • Payroll dates are known by employees and employers.
  • Payroll schedule becomes more streamlined, reducing the associated expenses with more frequent payroll methods.

• Drawbacks

  • Calculating overtime can be difficult.
  • Dates may need adjusting due to national or bank holidays.
  • Pay days are not always the same day of the week which can cause confusion.
  • Work weeks and pay cycles may not align.

Monthly Pay Period

• Benefits

  • Well structured.
  • Easiest for employers to manage their finances and for longer-term planning.
  • More efficiently with regards to time and money for the organization.
  • Best for free-lance and salaried employees who invoice monthly
  • Simplifies accrual and tax expenses for administration.

• Drawbacks

  • Can cause scheduling difficulties as the pay period will end on a different day of the week each month. Thus, the employer will have to decide when employees will be paid.
  • Can cause difficulties for employee budgeting.
  • Relatively poor for hourly workers.

What type of pay period should I use?

The pay period that you should use really depends on what works for you. What is the proportion of each payroll period type in your organization? Have you got a pay period process in place already that is working well? If you need advice, search out an accountant either externally or internally for counsel on what they think will work best.