Challenges in Paying Employees by Salary

In payroll, salaries are fixed earnings, paid for the elapse of specific time periods, commonly a pay period, month or year. The defining characteristic of salaries is they don’t depend on how much time is actually worked during these elapsed periods. Salaried employees are contrasted with hourly-paid employees, who are only ever paid regular wages for actual time worked.

Although salaries seem like the easiest way to pay employees, they can in fact lead to a number of payroll challenges.

One challenge is the common belief is that employees paid by salary aren’t entitled to overtime. There are many different exemptions from employment standards overtime requirements, but being paid by salary is never one of them. For example, the workweek threshold for overtime in the Ontario employment standards is 44 hours. If salaried-employee regular hours of work are 37.5 hours, these standards don’t require anything extra to be paid for work between 37.5 and 44 hours, but they do apply to any work over 44 hours. Just being paid by salary doesn’t change that fact.

The term salary is also commonly applied to employees who should really be treated as hourly-paid staff. In the example above, we point to the common gap between regular hours of work (i.e. 37.5) and weekly or workweek overtime thresholds (i.e. 44 in Ontario). Employees truly paid by salary don’t receive any extra pay for time worked in this gap. Similarly, employees truly paid by salary don’t see their gross pay reduced when they work less than regular hours.

On the other hand, many employers do in fact adjust ‘salaries’ for variances, up or down, from regular hours. This is done by converting salaries to an hourly rate and using this rate to increase or decrease gross pay by variances from regular hours. In the end, it would be a better practice to define an hourly rate in such circumstances and pay regular wages, based on this rate, for actual time worked.

This leads us to the next challenge, converting salaries to pay period, daily or hourly rates. There are two separate parts of these conversions that have to be understood.

First, salaries defined on an annual basis obviously have to be converted to pay period amounts before they can be paid. This isn’t a problem for semi-monthly or monthly pay periods, where the number of pay periods is a fixed 24 or 12. However, for weekly or bi-weekly pay periods, there can be years when the count of pay periods is 53 or 27, rather than 52 or 26.

How should these extra weekly or bi-weekly pay periods affect pay period gross pay? There are two options:

  • For the year concerned, recalculate pay period gross as the annual amount divided by 53 or 27; or
  • Leave the pay period gross unchanged, meaning employees receive an extra weekly or bi-weekly pay for the year concerned.

These options are different, but equally acceptable, definitions of the time period covered by salaries: the former are truly annual salaries, whereas the later are better understood as salaries defined on a pay period basis. The main point for employers to understand is that, if the employer is to reduce weekly or bi-weekly salaries, in years where there is an extra pay period, this should be well laid out in individual or collective contracts of employment. In other words, the annual nature of salary amounts should be clearly defined.

The second issue is the conversion of salaries to daily or hourly rates. Depending on the pay period type, and the nature of salaries as either pay period or annual amounts, there may not be a constant number of regular work hours or days in each pay period. There aren’t exactly 52 weeks in a calendar year (52 x 7 = 364, not 365 or 366). The number of days in a calendar month ranges from 28 to 31. Further, calendar years don’t start on the same weekday: January 1 falls on a Wednesday in 2014, a Thursday in 2015, etc.

All of these factors impact how salaries are converted to daily or hourly rates. In the following, assume regular hours are 5 days per week, 7.5 hours per day and the salary to convert is either $75,000 per year or $2,884.62, defined on a bi-weekly pay period basis ($75,000 / 26).

Where salaries are defined on a pay period basis, conversions are done using the number of regular work days and hours in the pay period.

Where salaries are defined on a bi-weekly basis:

  • The daily rate is $2,884.62 / 10 or $288.46; and
  • The hourly rate is $288.46 / 7.5 or $38.46.

Where salaries are defined on an annual basis, for semi-monthly or monthly pay periods, conversions are done using a nominal 52 weeks per year:

  • The daily rate is $75,000 / 52 / 5 or $288.46; and
  • The hourly rate is $288.46 / 7.5 or $38.46. This is the same as saying there are 1,950 hours per year (7.5 hours/day x 5 days/week x 52 weeks) and dividing $75,000 by 1,950.

For weekly or bi-weekly pay periods, annual salaries are converted using the count of pay periods in the year:

  • For 27 periods per year, the daily rate is $75,000 / 27 / 10 or $277.78; and
  • The hourly rate is $277.78 / 7.5 or 37.04.

These calculations ensure that daily or hourly rates remain constant, despite changes in the number of days per pay period, month or year. If daily or hourly rates are expressed as 2 decimal points ($37.04 rather than 37.037), there will always be rounding differences against annual salary amounts (i.e. $37.04 x 7.5 x 10 x 27 = $75,006). Note, daily and hourly rates for 27 bi-weekly pay periods are lower than those for the same salary expressed on a true bi-weekly basis. This shows the effect of lowering bi-weekly gross pay when salaries defined on an annual basis are paid in 27 bi-weekly pay periods.

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article first appeared on Canadian HR Reporter on January 21, 2014.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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