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An efficient pay cycle is a crucial part of any business’ operational workflow. It not only nurtures trust and reliability among employees but also ensures that businesses do not violate any legal compliances. Payroll efficiency also reflects upon the employer brand positively. That’s why choosing the right pay period, which can benefit both employees and employers, is essential for businesses.
What is a Pay Period?
A pay period refers to the time frame between two consecutive pay dates. These pay cycles can be of varying lengths, from daily to monthly. During this time frame, employees’ working days or hours are counted to determine how much they’ll get paid. Pay periods also determine how often employees get paid in a year.
Pay Period vs. Pay Cycle
Pay period and pay cycle are essentially the same thing. Both terms are often used interchangeably to refer to the length of time during which an employee would work before getting paid.
Types of Pay Periods
There are different payroll schedules that can be adopted by businesses of different sizes from different industries. Here are some of the most popular pay cycles companies use today:
1. Daily
This pay period is used to pay employees every day. It is prevalent in businesses that pay their employees hourly rates. The employees are paid according to the number of hours they work each day.
This pay cycle is usually preferred by employees who require a lot of flexibility in receiving their wages, especially if they’re living paycheck to paycheck. Besides, if they work overtime, they are immediately paid for it, which can give them better and more frequent access to spendable income.
But for businesses outsourcing their payroll, daily pay periods can become an expensive venture. Processing charges can add up and lead to unprecedented expenses. For businesses that process their payroll in-house, daily pay cycles can also add significantly to their everyday workload.
2. Weekly
In weekly pay cycles, employees are paid every week, on specific days, usually Thursdays or Fridays. An annual pay period consists of 52 days. This pay period can be an ideal choice for employees who have irregular shift schedules. For instance, if a student can work part-time for 30 hours for one week and 10 hours the next, they would find it easier to plan and manage their finances with weekly pay checks.
However, a weekly payroll schedule can pose a huge challenge for accounting departments. Weekly payouts can add significantly to the workload, especially if overtime, accruals, and deductions are calculated manually.
3. Bi-weekly Pay Period
In a bi-weekly pay period, employees are paid every other week on a specific day. This results in 26 pay periods in a year (27 in the case of a leap year). This is also another beneficial option for employees who need cash on hand frequently.
Managing and calculating overtime for this schedule is also much easier. Employers also find it convenient to process, as biweekly payouts make it easier to calculate taxes.
One challenge posed by a bi-weekly payroll schedule is that calculations can become complicated when it comes to monthly reports. Some months can require a third pay period, which will require more work for accounting departments. It also opens up a higher possibility of errors. Besides, monthly employee benefit deductions also become complicated.
4. Bi-monthly
For bi-monthly pay cycles, employees are paid twice a month. They are paid on fixed dates, like on the 1st and 15th of every month. This leads to 24 pay periods in a year. This cycle is very similar to the bi-weekly one, except the payout dates are fixed.
The biggest advantage of this pay period is that employees are familiar with the payday schedule. As payout dates are fixed, variables like extra days or extra weeks in a month don’t cause any complications. This pay cycle is ideal for salaried employees.
But it can be difficult to calculate overtime during this pay period, especially for those with irregular schedules. This isn’t an ideal choice for hourly employees either, Moreover, pay checks can be delayed if the payout dates fall on weekends or holidays.
5. Monthly
Employees are paid once a month on a fixed date in this pay cycle. With only 12 pay periods in a year, this is a cost-effective choice for many businesses. Tax deductions and calculating benefits become a lot simpler on a monthly basis.
Not only does it create a lesser workload for the accounting team, but it is also easy to track payroll expenses. This can help companies understand and plan their cashflow and make improvements to the payroll process to further optimize it.
But monthly payroll can create a financial burden on employees. They can find it difficult to plan for expenses throughout the month. Besides, calculating overtime can also become complicated on a monthly cycle.
7 Factors to Consider for Choosing the Right Pay Period
Companies cannot just arbitrarily select a payroll schedule and expect it to work out. A payroll cycle can be influenced by a lot of factors, and businesses need to take them into account before putting a payroll process in place. Here are some things a business should consider:
1. Cashflow
How much money a business brings in matters a lot when it comes to paying their employees on time. Even rapidly growing businesses can fall short if they don’t recognize the dependency between payroll and cashflow. For instance, if a company gets paid for its products or services 30-40 days after generating an invoice, it will be cumbersome to pay employees on a weekly or even a bi-monthly basis.
2. Statutory Compliance
Laws pertaining to payroll can vary from region to region. For instance, some countries can require employees to be paid weekly, some countries have mandated monthly or bi-monthly pay cycles. Pay periods can also vary for different types of employment within a single company. Employers need to be aware of these regulations and choose a pay period that doesn’t violate regulatory compliance.
3. Workflow
Businesses also need to take into account the manpower and administrative workload that their HR departments can handle. For larger corporations with salaried employees, the lower the frequency of pay periods, the easier it becomes to process them.
4. Administrative Costs
These are additional costs that are incurred when depositing payroll – like direct deposit fees, processing fees, etc. For instance, when companies deposit money into their employee accounts, they may be required to pay a certain fee. These costs can add up if the company is processing payroll daily or bi-weekly. Simply put, the more frequent a pay cycle is, the more expensive it becomes.
5. Industry Standards
Pay periods can differ from industry to industry as well. For instance, businesses in construction or retail mostly employ daily, weekly, or semi-monthly pay periods, as it is preferred by blue collar employees. In this case, having more flexible pay period options can also give companies a competitive advantage. Frequent pay periods can serve as an incentive to attract more skilled employees.
6. Employee Benefits
These incentives consist of add-ons like health insurance, bonuses, education assistance, and discounted childcare. These benefits also come at a cost to the employer. But some of them can be tax deductible. That’s why finding out which pay period can help businesses optimize these costs will be a huge plus. Besides, incentives like insurance are counted on an employee’s gross salary, and the calculations can become unnecessarily complicated with more frequent pay checks.
7. Employee Preferences
Businesses must also keep their employees’ preferences in mind. For instance, if a student studying abroad is looking for a part time job, they’d choose a job that pays them weekly or biweekly and it’ll give them more frequent access to liquid cash. Similarly, if a salaried employee faces a medical emergency, they need cash for, they can benefit from a company that can give them a salary advance.
Finding the Pay Period that Suits You Best
Businesses have a lot riding on an efficient payroll process. Ensuring that employees are paid the right amount and on time can contribute greatly towards building a loyal and motivated workforce. Besides, legal compliance is also necessary for a business to succeed. That’s why understanding the pros and cons posed by different pay periods is essential.
To further manage pay periods with efficiency, businesses can consider investing in payroll management software, like the one by Akrivia HCM. With a dedicated payroll management software, managers can keep track of payments, overtime hours and manage multiple pay periods for different kinds of employees. This will not only contribute to a smoother workflow, but also add to employee satisfaction.
Which pay period would you consider for your employees? Let us know in the comments.
