Here’s a test of your payroll knowledge:
Carole was hired effective November 9, 2015. Her annual salary is $66,000 and is paid on a semi-monthly basis. Her regular hours of work are 37.5 hours/week, Monday to Friday. How much should Carole be paid for the semi-monthly period ending November 15, 2015.
There are several possible options in how this pay might be calculated:
- Pay Carole her daily rate for the days worked between November 9 and 15 inclusive?
- Prorate her pay period salary using the count of work days in this pay period?
- Prorate her pay period salary using her nominal pay period regular hours?
- Prorate her pay period salary using the count of calendar days in this pay period?
Each of these approaches would result in a slightly different salary owing. So which are better approaches than the others?
The answer lies in key attributes of semi-monthly versus weekly/bi-weekly payrolls, both the number of periods per year and their length in calendar or work days.
For weekly or bi-weekly payrolls, the length of each period in calendar days is fixed, at 7 and 14 respectively. However, the number of periods per year varies because calendar years aren’t an even multiple of weeks: calendar years are 365 or 366 days in length, not 364 days (52 times 7).
Semi-monthly payrolls have the opposite attributes. The count of periods per year is always fixed at 24, but the number of Monday-to-Friday work days in each period may vary. There’s two reasons for this. One, months aren’t all the same length (i.e. 31 calendar days in January, but only 30 in June) and, two, days of the month don’t fall on the same week day each year (i.e. November 4 is a Wednesday in 2015, but a Friday in 2016).
Given the varying length of semi-monthly pay periods, which of the 4 options above are best practices and which are not? The best answers are those which minimize the impact of these varying number of calendar or work days. This impact is minimized in options 1 and 3 above.
For option 3, the following steps are required to calculate how much Carole should be paid for her work from November 9 to 15:
|1. Calculate the nominal work hours in each pay period.||37.5 hours/week, times a fixed 52 weeks, divided by the number of periods/year or 24. The answer is 81.25.|
|2. Calculate Carole’s normal pay period salary.||Divide $66,000 by the number of periods/year or 24. The answer is $2,750.|
|3. Prorate this salary based on the nominal work hours above and Carole’s hours worked from November 9 to 15.||For the 5 days from November 9 to 15, Carole worked 5 days at 7.5 hours per day or 37.5 hours.
$2,750 times 37.5, divided by 81.25 equals $1269.23
Option number 1, using Carole’s daily rate of pay for the actual days worked, involves the following steps:
|1. Calculate Carole’s daily rate of pay.||Divide her annual salary by a fixed 52 weeks/year and by the 5 work days in her Monday-to-Friday work schedule.
$66,000 divided by 52, divided by 5 equals $253.85.
|2. Carole’s pay is this daily rate times the number of days worked.||5 times $253.85 is $1,269.25.|
So why is it a best practice to minimize variances between the length of semi-monthly pay periods? The easiest way to explain this is to compare Carole’s pay for the period November 9 through 15, with the pay owing, if she had been hired effective November 24. From November 9 to 15 there are 5 Monday-to-Friday work days. Similarly, there are 5 Monday-to-Friday work days from November 24 to 30. In the 2 options above, 3 and 1, Carole’s pay would be the same, whether she had been hired on November 9 or 24.
However, in the 1st semi-monthly pay period in November, 2015, there are 10 Monday-to-Friday work days. In the 2nd semi-monthly pay periods in that month there are 11. If Carole’s pay was calculated using either options 2 or 4 above, which are both based, at least in part, on the length of the pay period, her pay for a November 9 hire would be different than that for a November 24 hire.
Using option 2, Carole’s semi-monthly pay, $2,750 (step 2 in option 3), would be prorated by 5 days over 10 for a November 9 hire and 5 days over 11 for a November 24 hire. For the 1st of these periods, using option, 2 Carole’s pay would be $1,375 ($2,750 X 5 / 10) versus $1,250 in the 2nd ($2,750 X 5 / 11).
Why should Carole be paid differently for these same 5 work days, just because there’s an extra work day in the last half of November? That’s the argument against options 2 and 4.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 25 years’ experience in all aspects of payroll. He can be reached at email@example.com or (250) 228-5280. If you like these articles, please consider buying one of my Need to Know resources. Signup to my email list to be notified as new resources are added, including webinars and seminars.