What Is Your Ideal Payroll Cycle?
As much as your employees probably love working at your company, they’re also there to further their careers and earn a living wage. Employees need and want to be paid — and they definitely have preferences about how they go about getting that paycheck.
Past generations had the experience of picking up a check (or receiving it in the mail) once or twice a month. But today’s employees have much more choice on how they receive their payments. What if they want their paychecks more frequently than once a month, or want the money to be accessible as soon as they earn it? What’s more, you may decide to switch up your payroll cycle depending on cash flow needs, the cost of running payroll, or other factors specific to your company’s setup.
In any case, your classic payroll cycle is worth rethinking. Here’s our guide to the most common types of payroll cycles, their pros and cons, and how to decide which system is best for you.
What Is A Payroll Cycle?
A payroll cycle consists of two elements:
- The pay period - How long employee labor will be tracked before issuing a round of payment.
- The pay date - When they’ll receive that pay for the pay period.
It should be noted that a payroll cycle is not the same as a workweek, which is the legal definition of seven days as it is (and must be) processed by payroll. This is all established by laws around reasonable work hours per the Fair Labor Standards Act of 1938.
It’s best to think of a payroll cycle as a unit of measurement, not a sequence of events after which an employee is paid. An employee isn’t necessarily always paid at the end of a payroll cycle. It’s advised that companies based in the United States take care to research the laws applicable in their state pertaining to when an employee absolutely must be paid after the conclusion of a pay period. It varies by area, and it’s important not to get it wrong.
Why Choose One Payroll Cycle Over Another?
You may be wondering why it makes a difference when people are paid over the course of a month. Other than giving employees their paychecks at a particular time, why would you consider changing a payroll cycle?
Cash Flow Patterns
Selecting a certain payroll cycle means that the company is committing to having a certain amount of cash on hand to pay employees during a certain period. If you’re a highly seasonal business or your busy periods vary throughout the week or month, some shorter payroll cycles may not be feasible for you. To make payroll work with your cash flow patterns, you might want to switch to a longer payroll cycle. However, employees may be open to receiving paychecks only once per month if it means they receive a consistent amount every time. This can be very helpful for restaurants and other businesses that involve tipping.
Even when done in house, payroll processing isn’t free. You still need to pay your HR team’s wages to run payroll each time. On top of that, you probably have to pay for payroll software and bank processing fees for each pay period. All of this can add up significantly if you decide to pay your employees more frequently. Deciding on a payroll cycle may be as simple as doing the math on how frequently you can afford to process payroll on a regular basis. This especially applies if you offer services like direct deposit.
Payroll Department Needs
It’s important to consider what will work best for your payroll team and where they can best allocate resources. Depending on the size of your company, frequent paychecks may significantly increase the workload of your HR team, and it may not be the most efficient use of their time. You may also find that you can’t reasonably pay employees by the deadlines every time, which can cause serious issues (not the least of which is a team of disgruntled employees).
Do your employees have explicit preferences regarding payroll cycles? It always helps to ask for feedback from the general employee population before implementing a new payroll system, as they’re the ones that will actually be experiencing the results. For example, a shorter payroll cycle might help keep finances consistent for employees if workweeks are irregular. Your company may hire different types of workers (full time, part time, contract, etc.) and the system must speak to everyone’s needs.
Of course, it is important to obey the laws of your local areas and those pertaining to your industry. Some pay cycles are explicitly illegal in certain states, most often setting a minimum amount of times employees must be paid. Companies must also make sure it’s easy to deduct taxes and no IRS regulations are being violated. Be aware of minimum payroll cycle laws, which state that employers have to pay their employees by a certain point after a pay period. There may also be reporting requirements for labor laws and/or labor unions. If your company uses a human capital management system (HCM), targeted reporting functions would specifically help with this function.
Types Of Payroll Cycles
While the idea of a payroll cycle may seem to have infinite possibilities, there are really only a few cycles that make sense: monthly, bi-weekly, semi-monthly, weekly, and daily. Each cycle has its own benefits and drawbacks. While some payroll cycles are definitely more popular than others, what works for other businesses may not work for you. It bodes well to go in with an open mind.
In a monthly payroll cycle, employees are paid once per month. There are fewer pay periods overall, which can lighten the burden on the payroll department significantly more than other forms of payroll. Benefits and payroll calculation procedures are conducted only once per month. No particular industry favors monthly payroll cycles, but it’s proven popular for companies with 10 employees or fewer (perhaps because of its lower processing cost).
However, this setup severely disadvantages new employees who may not be paid for weeks upon employment. Employees may not appreciate having to budget out finances for an entire month from one lump sum. Calculations might be more difficult if your organization hires hourly workers that report different work schedules each week.
Biweekly vs. Semi-Monthly
Biweekly pay is a system wherein employees are paid every two weeks, regardless of date. Semi-monthly payments pay on the same date every month, regardless of the day. For example, a semi-monthly pay schedule may pay on the 1st and 15th of every month. But a biweekly schedule may pay on the first and third Monday of every month, regardless of the date.
Both of these systems allow for easy, consistent calculations of benefits across paychecks. As such these cycles are often preferred by companies for their predictability. Biweekly pay is the favorite payroll cycle of most industries, with 45.7% of businesses surveyed by the Bureau of Labor Statistics in 2022 choosing to use this system. It’s particularly favored by the education and hospitality industries.
Semi-monthly pay is preferred by companies in the information industry (software, media, creative services, etc.), and was reported in 2022 to be the main preference for American companies with nine employees or fewer.
The primary disadvantage of a semi-monthly system is that some workweeks may not line up perfectly with pay periods. This may cause frustration among employees receiving overtime pay, since processing timelines may prevent extra work from being factored into an upcoming paycheck. Hourly workers may see uneven payments depending on their chosen shifts. Semi-monthly schedules allow for the possibility that payday falls on a holiday or weekend, which may cause delays in pay distribution.
Biweekly schedules in particular can be inconsistent for both paychecks and benefit payment calculations. They also require occasional three-paycheck months, which can be great for employees but stressful for payroll.
Offering employees the option to be paid on a weekly basis can (in theory) help simplify payroll and calculating aspects like overtime. It can also be better for hourly employees and people with unusual hours, because employees can better predict their pay and work more or fewer hours to immediately affect the numbers. There’s a reason why this system (as of 2022) was reported as being used by 82.4% of construction companies and 66.3% of logging and mining companies.
However, this payroll cycle can be particularly demanding on payroll. More frequent paychecks mean that calculations for benefits need to be performed more frequently. If employees work jobs at different rates of pay, those calculations and record verifications need to be done weekly instead of simply once or twice a month. It may not be sustainable for payroll to do this regularly for large numbers of employees.
There has been a recent rise in apps designed to dispense money immediately upon request from employees. This applies to money the employee has already earned, by way of taking it from their future paycheck. It can be a lifesaver for employees facing a sudden expense or if paycheck dispersal is slow due to unforeseen circumstances.
It’s important to note that this is not a standard practice across most companies for one distinct reason: as of 2023, it is only offered through independent apps that must be harmoniously integrated with an existing payroll system. These independent vendors may have additional fees attached with every transaction, which may weigh upon individual employees who decide to use the system consistently. But there may also not be enough interest from employees to facilitate a full integration.
A company’s payroll cycle should speak first and foremost to the needs of your company and your employees. Be sure to ask for and take advice and guidance from experts in your field to ensure that you think of every possibility (and aren’t breaking any laws by changing your pay schedule).
There is also the option to have different pay schedules running concurrently, especially if you have a lot of people with different employee classifications. It’s well worth spending the time and effort to create a payroll system that works with employees’ preferences and needs.
Criterion helps make payroll easy, with automated calculations and complete customization ability to streamline and optimize your process. Our automation features make payroll easy and take the guesswork out of complying with regulations. All you have to focus on is taking care of your employees.
If you want to try a new payroll cycle, built-in tax calculators with Criterion will help you stay compliant. Processing payments, preparing for taxes, and even syncing time data is easy to manage with Criterion. Plus, you’ll have zero payment delays.
Request a demo today to learn more about Criterion and how you can improve your payroll cycle today, so your employees can get paid the way they want without delay.