What Are Pay Periods and How Do They Work

Structuring payroll is a huge business decision that’s critical to your success. Pay periods keep employees compensated in a fair and timely manner. They also simplify the billing, timesheet, and invoicing process so businesses can meet their payroll obligations consistently.

Understanding pay period structures is essential for companies with hourly and salaried employees since those two employment structures have different rules. In addition, the pay cycle must comply with tax regulations and US Department of Labor laws.

What are pay periods?

Pay periods are the recurring time frames used to calculate earned wages and determine when employees get paid. They are fixed and based on the schedule payroll departments use to compensate employees.

Pay periods occur weekly, bi-weekly, semi-monthly, or monthly. You’ll need to calculate payroll hours with these periods in mind.

Pay periods differ from pay dates because they represent the duration of time an employee has worked and when payment is due. The pay date is the day when the worker receives the paycheck for hours worked.

In most cases, the pay date comes a few days after the end of a pay period.

The pay period affects how an employer calculates the total gross pay for salaried and hourly workers. Gross pay for hourly staff varies because it depends on the work hours. It’s the product of the hours worked and the hourly rate.

When hourly employees earn overtime, employers must apply that overtime to the pay period in which employees earned it. The Fair Labor Standards Act (FLSA) has stringent overtime requirements and regulations for businesses to follow.

The pay cycle determines payroll frequency and the specific day team members get paid. Staff on a monthly payment schedule receive payment on the last day of the month. While bi-weekly pay periods are the most popular structure in the US, they often result in pay period leap periods — it’s just something you’ll want to keep in mind as you consider your salary budget.

Types of pay periods

There are four primary types of pay periods in the US: weekly, bi-weekly, semi-monthly, and monthly. The choice of pay period type is critical because it affects mandatory business compliance requirements.

In addition, some states have provisions that govern the process of picking a pay period. Take a closer look at the four common pay period types.

1. Weekly

A weekly pay period is popular because it aligns with the workweek. It results in team members earning 52 paychecks a year, and they get their compensation on a set day of the week.

Most companies pay one week in arrears. Employees turn in timesheets weekly and receive payment at the end of the following week.

• Pros: Weekly pay periods coincide with the workweek, allowing seamless compliance with FLSA overtime pay laws. A weekly pay period improves employee retention and engagement in roles with high turnover rates. They’re well suited for seasonal industries and companies where tips comprise a significant portion of employees’ wages.
• Cons: Administering a weekly payroll can prove time-consuming for companies with a large workforce. It can become expensive for companies using third-party payroll providers that charge per payroll cycle. A weekly payroll increases the effort necessary to administer tax withholdings, employee benefits, paid time off, and holidays.

2. Bi-weekly

A bi-weekly structure is the most popular pay period in the US. Nearly 42% of the private companies in the country use this method.

With a bi-weekly pay cycle, employees receive their paychecks every other week for a total of 26 paychecks a year. The pay structure is popular with large companies with more than 1,000 employees.

• Pros: Bi-weekly payrolls appeal to employees because they have consistent and predictable paydays. Bi-weekly pay cycles can result in three paychecks in certain months of the year. It’s easy to calculate overtime, holidays, sick off, and paid time off using a bi-weekly pay schedule.
• Cons: Some months of the year will have three paydays, which may complicate the bookkeeping process. Companies may struggle to meet the extra payrolls that occur twice a year.

3. Semi-monthly

Semi-monthly pay periods have two pay dates each month, resulting in 24 paychecks a year. The paydays fall on the 1st and the 15th or the 15th and the final day of the month.

Semi-monthly pay cycles are the third most popular choice in the US. The payday will typically move to Friday if the payday coincides with the weekend. Semi-monthly pay periods are popular in the logging, mining, financial, and IT industries.

• Pros: Semi-monthly pay cycles are highly consistent. They fall on the same dates every month and are easily adjustable for leap years and odd-numbered months. Companies with salaried employees have an easier time preparing payroll since the paychecks are equal and predictable. Bi-monthly ease the process of administering employee benefits and withholding employment taxes.
• Cons: Workweeks in a semi-monthly pay cycle may overlap and make it difficult to calculate overtime. Some states, such as Massachusetts, prohibit companies with hourly employees from using bi-monthly or monthly payments.

4. Monthly

Companies with monthly pay schedules pay employees at the end of the month. However, less than 10% of small business owners in the US use a monthly pay period, with most having fewer than nine employees.

• Pros: Monthly pay cycles simplify the budgeting process while enabling cash flow flexibility. They work well for companies with salaried employees, and the monthly pay period eases the process of administering employee benefits, tax withholdings, and budgeting.
• Cons: Monthly payrolls become highly complex for companies with hourly or non-exempt employees. Some states, such as Massachusetts, outlaw monthly pay cycles for hourly employees. Texas only allows monthly payrolls for employees with an FLSA overtime exemption.

Companies may also consider fixed length and custom pay periods along these four standard options.

Fixed length

Some sectors, such as education, often use pay cycles that fall outside the conventional pay periods. For example, teachers and administrative staff don’t work during the summer.

In some states, public school districts allow teachers to break their annual salary into 21 paychecks or use the conventional bi-weekly schedule. Most districts often pay the additional five pay period as a lump sum in early summer.

Custom

Special circumstances such as termination and resignation require employees to receive payment outside the standard pay frequency. No federal laws govern the final payment period, so it varies from state to state. In Colorado, terminated employees must receive payment immediately. In Connecticut, employees must receive their final wages within one business day.

Employment laws regarding pay periods

Federal and state laws are significant considerations when choosing pay periods. Typically, there are no federal laws dictating the frequency of pay cycles. But most states have specific laws regulating the number of hourly team members’ pay periods.

Massachusetts prohibits bi-monthly and monthly pay cycles for hourly employees. Texas allows monthly paychecks for employees with an FLSA overtime exemption.

Some states also have helpful legal provisions to protect workers in particular groups. For instance, Rhode Island allows childcare staff to choose their paycheck frequency.

The pay regulations in each state are available through its Department of Labor.

How to determine pay periods for your company

The best pay cycle prioritizes your company’s needs, type of work you do, state regulations, types of employees, and cash flow. You may opt for different pay periods if you have different types of employees. Prioritize these seven factors when choosing pay periods:

1. State regulations

Carefully review your state’s wage and labor laws since some states have stringent regulations.

2. Workweeks

Align your pay cycles to match the workweek and simplify overtime calculations. This will streamline the payment process and help you avoid payroll issues.

3. Payroll costs

Choosing the right payroll service may help lower your total payroll costs. Third-party payroll services often charge per payroll cycle, so having more cycles will increase your expenses.

4. Overtime

Overtime requirements and compliance may help inform your choice of a pay cycle. The best option lets you breeze through overtime calculations when dealing with FLSA exempt or non-exempt employees.

5. Employee needs

Two-thirds of the American workforce prefers frequent paychecks because it eases financial stress. A favorable pay cycle improves job satisfaction and engagement. It may also lower your turnover rate.

6. Tax withholdings

Pick a payment cycle that simplifies your ability to calculate tax withholdings since this process is a mandatory business payday requirement. Payroll software improves your tax withholding capabilities, even when dealing with complex pay structures.

7. Reporting

Pay periods affect your ability to comply with labor and employment laws recording and reporting requirements. To meet FLSA compliance, you’ll need to maintain immaculate records of worker compensation information, including wages, tips, benefits, and other perks.

Manage pay periods for hourly employees with ease 

Hubstaff’s payroll tracking software manages payroll for hourly employees with easy-to-use automations and integrations that connect with Quickbooks or your favorite HR system.

Hubstaff uses a mobile app, desktop-based, or web-based tracker to track employee time. Simply set the rates and hours, then integrate your payroll method — we even offer automated international payments. Hubstaff will handle the rest.

Once you’ve reviewed the timesheets, Hubstaff will automatically calculate the wages and dispense them. You can:

• Customize the payment frequency
• Schedule employees
• Pay for time off
• Make it easy for your team in and out

The Hubstaff payroll system eliminates common pay period issues and will make it easy to handle various hourly rates, PTO, and pay cycles. Try Hubstaff today to streamline your payroll processes.

---