Calendar anomaly creates ‘extra’ pay day
The new year always seems so boundless in these first weeks after the holidays. But for payroll administrators, there’s a reason why this year feels longer than other years.
This year has 53 weeks — well, 53 weekly pay periods, anyway. At organizations where workers are paid every two weeks, there may be 27 pay periods instead of the normal 26.
Some people blame this on 2004 being a leap year, but that has nothing to do with it. Every 11 years, the days fall in such a way that an extra pay day nudges its way into the year. At organizations that pay weekly, the extra pay day comes around every seven years.
Employees who received their first bi-weekly cheques of the year on Jan. 1 or Jan. 2 — a Thursday and Friday this year — will get their 27th cheque on Thursday, Dec. 30, or Friday, Dec. 31.
It’s just a quirk of the calendar, but one that has the phone lines lit up at the Canadian Payroll Association. Last month, more than 100 queries came through the association’s Payroll InfoLine telephone and e-mail hotline. Carswell’s Payroll Consulting Hotline has also been similarly abuzz.
In essence, the main point of confusion centres on whether that 27th pay represents a bonus. If so, it’s a substantial amount: a bi-weekly paycheque represents 3.8 per cent of the yearly salary; a weekly paycheque 1.9 per cent.
So companies may be tempted to adjust each paycheque that goes out this year — by dividing the annual salary by 27 instead of 26.
They would be advised against it, said Steven Van Alstine, manager of the payroll resource group at the Canadian Payroll Association.
A yearly salary of $39,000 usually means 26 bi-weekly pays of $1,500. Divided into 27 pay periods, each pay would amount to just $1,444. “If I’m told that I’m getting $1,500 bi-weekly, then that’s what I expect to see. And it’s not going to cut it for the company to explain that there’s 27 pay periods and so forth. This is going to have a negative impact on the employee,” said Van Alstine.
And if a person’s salary is set as a pay period amount, adjusting the pay would constitute changing the conditions of employment.
In instances where the salary is fixed on an annual basis, using 27 as a divisor may still be tempting, but it would mean the employee may be short-paid the full amount, said Alan McEwen, a payroll and HR systems consultant.
Think of the distinction between the pay day and the pay period, he suggested. An employee handed a bi-weekly cheque on Thursday, Jan. 1 was in fact paid for the work she did in the two weeks of Dec. 21-27 and Dec. 28-Jan. 3.
“If the pay is expressed on an annual basis and you pay bi-weekly or weekly, you’ll get into difficulties if you prorate based on 27 pays instead of 26. True annual salaries should only be paid on a semi-monthly or monthly basis,” said McEwen.
CPA chair Patricia Kelly said most organizations are setting up the accrual to absorb the additional costs. “It all averages out in the end. We all know that things never fall perfectly into 26 weeks, even in a normal year. You always have to adjust for a few days.”
As for CPP or QPP deductions, Carswell’s manager of payroll consulting group, Annie Chong, said organizations should deduct 4.95 per cent — the contribution rate this year — from an employee’s pensionable earning for the 27th pay period, without taking into account the pay period exemption amount for the 27th pay period. That’s if the employee has not reached the maximum contribution of $1,831.50.
For Employment Insurance premiums, organizations should apply a straight 1.98-per-cent deduction from the employee’s insurable earnings in the 27th period — again, provided that the employee has not reached the annual maximum of $772.20.
