Changing Pay Frequencies Cause Frequent Payroll Challenges

Employers must understand the ways in which changing pay frequencies affects both payroll and employees, two payroll experts said May 8.

Businesses might decide to change the employees’ pay frequency for several reasons, said Gerard Hall, Payroll Operations Director for CBIZ. Some common reasons include making operations more efficient, improving employee satisfaction, or becoming compliant with wage-hour law.

“Another reason I see is when multiple companies or legal entities come together through acquisitions and they have different pay frequencies,” said Lori Carter, Director of Payroll and Human Capital at Guidehouse. “And so you consolidate them in order to make the [payroll] process more efficient.”

Some businesses also change pay frequencies so that employees are paid in arrears instead of current, she said, at PayrollOrg’s 42nd Payroll Congress. Paying in arrears allows employers to pay wages for labor performed in a previous time period instead of paying wages at the end of the period in which they are earned.

However, employers may not repeatedly change pay frequencies or change them to avoid overtime payments to employees, Hall added.

Any changes to pay frequencies must comply with the law of the states that affected employees work in, he said. State law governs how often employers must pay employees, not federal law.

Employers should also consider potential internal payroll challenges, he added. Payroll professionals will have to adjust the pay periods within their systems, recalculate deduction amounts, and possibly create an interim pay period to transition to the new pay frequency.

“You may need to create what is considered a transitional period or an interim period,” he said. “Let’s say you are doing a pay frequency change Jan. 1. Well, Jan. 1 may not technically be the start of a pay period, so you might have to do an interim pay period to pay from the first to the fifth, and then the sixth would start the new adjusted pay frequency.”

Payroll professionals will also need to recalculate salary pay, Hall said. For example, if a salaried employee will transition from a semimonthly pay frequency to a biweekly pay frequency, the employee’s annual salary will have to divided by 26 instead of 24 to determine how much is paid each pay period. As part of the recalculation, employers must also ensure that employees still receive their full annual salary by the end of the year, he added.

Changing pay periods also causes challenges for affected employees, so employers should communicate with them in advance, Hall said. For example, employees might want to update their Forms W-4, Employee’s Withholding Certificate, and adjust any flat amounts taken from their paychecks.

Payroll professionals can help communicate changes to employees by establishing a communication team with others in the organization, including human resources departments, legal teams, professional development groups, and, if possible, company executives, Hall added.

Generally, it is good practice for employers to notify employees at least 90 days in advance, but a few states might require employers to give notice at least 180 days in advance, Carter said.

In addition to notifying employees, employers should integrate the pay frequency changes into their existing human resources documents and, if applicable, any union forms, she said.

“Oftentimes, you will need a new union enrollment form because of a pay frequency change,” Carter said. “Otherwise, it’s going to come back and bite you.”

Throughout the process of changing pay frequencies, payroll professionals should show empathy to employees, especially those who do not understand the process, Hall said.

“You want to make sure that you are prepared to handle difficult situations [with employees],” Hall said. “You don’t know people’s situations or people’s scenarios.”