What is a payroll leap year and does it apply to you? Learn the critical details of this payroll topic and what you need to do to comply for your practice.
You may have heard a few people mention that 2015 is a “payroll leap year.” If you heard it from a fellow practice owner, they were probably also shouting curses and shaking their fists at the sky. This subject has come up a lot recently because 2015 is when most businesses will be affected. If you have no idea what a payroll leap year is or if you aren’t sure what to do about it, this article is for you.
What, when and why
A payroll leap year is any year that contains an extra payday. They happens because our 365-day year doesn’t divide nicely into 7-day weeks. Instead, there’s always an extra day to be accounted for - and every few years it’s a payday. This means, during a payroll leap year, employees who are paid biweekly receive 27 checks instead of the usual 26, weekly paid employees receive 53 instead of 52 checks, and employers enjoy an ensuing payroll nightmare.
However, since payroll leap years depend on which day of the week the year begins and ends on, they only affect employers with salaried employees paid biweekly or weekly. If all of your employees are hourly or are paid semi-monthly, payroll leap years never happen for you at all.
Otherwise, payroll leap years occur about every 11 years for employers who pay biweekly, and every five or six years for employers who pay weekly. That’s just how the math works out. And no, they don’t have anything to do with actual leap years - although each 366-day leap year throws your payroll calendar a bit further off-kilter.
So when is your payroll leap year? It depends on when you pay your employees. Since Friday is the most popular payday, 2015 is an especially likely year. The last day of this year falls on a Thursday, making Jan. 1st, 2016 -the New Year’s Day holiday-a Friday. Payday must therefore be pushed back a day to December 31, resulting in one extra paycheck during 2015.
Does this apply to you?
Every physician practice handles payroll slightly differently, so there will always be exceptions. However, if everything below applies to your office, 2015 is probably your payroll leap year:
• Your first payday this year was January 2.
• You pay your employees on a biweekly basis, not semi-monthly.
• You have salaried employees. (Hourly employees are paid by actual hours worked, which won’t change even if the year contains one extra payday.)
Note that this payroll issue applies to any employees you pay on a salary basis, not just to your “exempt” salaried employees.
If 2015 is indeed a payroll leap year for your practice, you’ll pay each salaried employee four percent more than usual this year. Depending on the number of employees in question, this could be a minor inconvenience or an unmitigated accounting disaster.
Alternatively, you could lower the amount of each paycheck to adjust for the difference, and thus avoid paying out any extra salary. This method comes with its own serious risks, however.
Look before you leap! (Sorry, that was awful)
Anytime you consider adjusting employee paychecks, you must be certain you’re on solid legal ground to do so. Before making any decision, have your pay policies and any employment contracts reviewed thoroughly by a payroll specialist or CPA if you use one. If you have employee contracts that specify a certain amount each pay period, or your state laws restrict how you may make changes in pay or notify employees, making paycheck adjustments might even be prohibited.
Get an expert’s opinion if there is any doubt. Violating an employment agreement is a lot more expensive in the long run than just cutting an extra paycheck.
If you make no adjustments…
Most offices don’t adjust anything, and just pay the extra salary. It avoids morale problems (who’s going to complain about getting MORE money?) and any thorny legal issues, but it’s at the expense of your wallet - and no small expense, at that.
Since doing nothing will result in salaried employees being paid more than usual this year, employees should be warned about potentially being bumped into a higher tax bracket, or losing eligibility for some income-capped programs. The extra salary could also limit the amount an employee can contribute to their 401K plan.
If you adjust this year’s remaining paychecks…
If your practice isn’t in a position to absorb extra costs, you may also be able to avoid paying the extra salary by adjusting your employees’ remaining paychecks for the year to offset the difference. Although each paycheck will be a bit smaller than normal, the employee will ultimately receive their full annual salary.
This has to be undertaken very carefully, however. Depending on your state’s employment laws and the size of the adjustment, there are countless potential hazards with this method. You should really only consider doing this if you have no other choice.
Consider the inevitable morale issues. For one thing your employees will hate this decision with the white-hot passion of a thousand burning stars. Also, if you pay non-exempt employees on a salaried basis, the lower salary will mean a decrease in their overtime rate of pay for the rest of the year. And keep in mind that you cannot reduce a non-exempt salaried worker's paycheck to the extent that their hourly rate would fall below minimum wage. You can easily run afoul of the Department of Labor and risk employment lawsuits if you make adjustments that break any laws.
One final note
Whatever you do, the decision must be communicated to and acknowledged by your employees in writing. An adjustment to an employee’s paycheck is not the type of topic that can be casually mentioned at a team huddle or discussed in the break room. If a dispute arises later, you’ll want to have written proof that all of your payroll practices were legal and above-board.
This is a challenging situation for any employer, but at least there’s a bright side. You won’t have to deal with it again for a few years!
Paul Edwards is the CEO of CEDR HR Solutions, the nation’s leading provider of customized medical employee handbooks and expert HR support for medical practices of all sizes and specialties. He can be reached at 866-414-6056 or firstname.lastname@example.org.