A semi-monthly payroll doesn’t have the rigid structure of a weekly, bi-weekly, or even a monthly payroll schedule. This flexibility allows for the salary expenses to easily fit into the expected budget so that tracking is a lot easier. It also means that the actual task of processing the payroll doesn’t have to be forced into certain windows. In return, the amount of available cash tends to be more accurate.
What is at risk? If you’re transitioning to a semi-monthly payroll system from one that has specific paydays, then there is a chance that some employees may not receive an expected paycheck. This means they might not be able to pay their mortgage on time, take care of their bills and other responsibilities, or feel like they’re being asked to work for no pay. There are other key points to consider here as well, so here is a look at the pros and cons of a semi-monthly payroll that should be considered.
The Pros of a Semi-Monthly Payroll
1. It makes the payment schedule a lot easier for the average employee to understand.
If you’re paying employees every other week or once per week, then the most common question you likely get is this: “When are we going to get paid next?” When a semi-monthly payroll system has been adopted, those questions go away because employees get paid on a fairly regular schedule. Most companies pay on the 15th day of the month and then again on the last business day.
2. It fits in with other forms of payroll.
Semi-monthly payroll can be included with other types of payment structures so that the needs of the employees and the organization can be effectively met. You’ll often find that larger organizations may have a bi-weekly schedule for full-time hourly employees, a weekly schedule for temporary and/or part-time employees, and the semi-monthly schedule for salaried employees.
3. It helps the companies cash flow.
This is especially true for benefit payments that occur in conjunction with the agreed upon wages. A system that pays benefits out on the Tuesday after the semi-monthly pay dates is often the best structure because it eliminates almost all of the banking holidays that exist in the United States. In return, you receive consistency with your benefit payments, employees know when to expect them, and your IRS obligations are much easier to manage.
4. It eliminates the issue with the odd days and leap year days that exist.
Other payment systems are forced to adapt to the odd-numbered days that are in a year and the occasional leap year day that comes around. Semi-monthly payroll can continue on unencumbered because the structure is set up to adapt to those changing circumstances. For the February final pay date, it will just be the last business day of the month, whether that falls on the 26th or the 29th. It doesn’t matter and employees still get their full compensation for hours worked.
5. Accruals are much easier to calculate.
If you’re paying out benefits twice per month, then the contracted benefits are pretty easy to implement. Just divide the agreed upon amount by 24 and you’ll know how much needs to be paid out with every payroll period. This means the overall processing costs are a little lower as well because although the compliance issues can sometimes be complicated, a clear set of policies and procedures can make even the most difficult pay periods easy to manage for everyone within the organization.
The Cons of a Semi-Monthly Payroll
1. It can be difficult to implement at times when employees are non-exempt.
The semi-monthly payroll tends to work best when a majority of an organization’s employees are on salary. This is because there aren’t overtime rules and other hourly wage changes that must be taken into consideration. The payment is the same for every paycheck and the payroll becomes a lot easier to process because there are no partial period payments that must be issued. On hourly workers, if the time isn’t logged correctly, it could affect your budget and available cash.
2. It can be confusing for the employee.
There will always be cut-off times where hours are no longer logged for the semi-monthly payroll. This cutoff time can be confusing because if someone worked 50 hours that week, but the overtime hours came after the cutoff time, that extra cash won’t be issued until the next payroll. This can be somewhat countered by the inclusion of transparent payment and cutoff schedules, but it won’t solve every problem. Expect any changes implemented to require at least 6 months of ongoing support for employees at minimum.
3. New employees may need to wait for several weeks to receive their first paycheck.
Depending on when the hours logged are processed, it may be 4-6 weeks before a new hire receives their first paycheck in a semi-monthly payment schedule. Many organizations will pay on the 15th for hours that were worked from the previous period [such as the 16th to the end of the previous month]. For an employee that starts on the first day of the month, they wouldn’t get paid then until the end of the month.
4. Compliance issues must always be addressed.
When the working week is broken up, pay cycles and full work weeks don’t always match up. This makes it difficult to calculate the various different types of pay that an employee might be receiving. Depending on the benefits package, it can be time consuming to the point that this form of payroll is more costly than any other. Accounting departments tend to prefer it for the flexibility in dating structure since instead of 26 or 27 pay periods to process, you’ve got 24, but the work tends to even out by the end of the year.
5. It may not be allowed under your local jurisdiction.
Some local laws may require that employees be paid on a specific date. Although it is the most common payroll frequency that is allowed in the United States, the floating final payday every month could be something that takes your organization out of compliance. Before implementing this structure or changing over to it, make sure there aren’t any potential legal restrictions or barriers you might run into.
The pros and cons of a semi-monthly payroll are important to consider, but eventually everyone will get used to the payment structure that is implemented. There will always be some rebellion if this change happens to employees who are used to a different payment structure, so be transparent about the need to change and what benefits will come with that change. Then employees can choose to either buy into the semi-monthly structure or begin looking for a new job.