What to Do With Leap Year’s Extra Paycheck?

leap yearLeap year has the potential to complicate everything from birthdays to software programs to your payroll department. In 2016, February’s extra day will fall on a Monday, and depending on when your company issues paychecks, an extra paycheck may fall either on the last day of 2015 or the last day of 2016. While your decisions for 2015 are already in the books, 2016 brings another round of leap year questions and concerns.

When Will That Extra Paycheck Show Up?

If your first paycheck of 2015 was issued on Thursday, January 1, then employees who are paid either weekly or biweekly will receive an extra paycheck on December 31st. If your first paycheck was issued on Friday, January 2nd of 2015, you may still be issuing an extra paycheck this year if your company policy states that employees will be paid the day before any major holiday. In that case, a paycheck would be issued on December 31, 2015 (the day before New Year’s), bringing the yearly total to 27 paychecks for employees who are paid biweekly or 53 for employees who receive weekly paychecks.

Extra paychecks will occur on December 31, 2016 for companies that pay their employees on Friday but do not alter the pay schedule over holidays.

What Complications Could Arise?

An extra paycheck can wreak havoc on your HR department if you have not planned ahead:

  • Salaried Vs. Hourly Employees
    Hourly employees should experience no problems in terms of compensation amounts since they will still be paid the same for the hours they worked. Hourly workers will receive an extra day to log hours during leap year (2016), while salaried employees who are paid weekly or biweekly will receive an extra paycheck in either 2015 or 2016.

  • Overtime Exemptions
    If an employer chooses to adjust each paycheck downward slightly in order to maintain the annual salary as stated in the employee’s contract, salaried employees with overtime exemptions may not meet federal wage thresholds for maintaining exempt status. Because the exemption requirements are calculated based on weekly wage thresholds, small changes can prevent an employee from remaining exempt even if his or her annual salary does not change.

  • Employee Benefits
    Benefits withholdings may need to be recalculated in order to avoid exceeding caps. Employees who withhold the maximum amount for a health savings account, for example, may need to have those per paycheck amounts altered in order to reach the exact limit without exceeding it by the end of the year.

  • Income Tax Withholdings
    Income tax withholdings will also need to be recalculated based on the number of paychecks issued during the year.

  • Other Withholdings
    Child support, alimony, or debt repayments may also need to be recalculated depending on the terms of the court order.

  • Employee Morale
    Perhaps one of the most overlooked complications that could arise due to different paycheck approaches is the issue of employee morale. If an employer decides to adjust paychecks downward to maintain the stated annual salary, employees may feel shortchanged. Doing so may open you up to pushback or even litigation in some cases.

Getting Your Ducks in a Row for 2016

Preparing your business for leap year takes some forethought and planning. There are several things you can do to prevent problems:

  • Take a close look at offer letters and contracts. If offers and contracts state a specific weekly amount, that amount should be maintained regardless of the annual total. Failure to do so could result in breach of contract claims. However, if compensation discussions stated an annual salary rather than a weekly or biweekly amount, you have room for flexibility.

  • Decide how you will incorporate the extra paycheck. Options may include: 1) smaller weekly or biweekly paycheck totals, 2) switching to a monthly pay schedule, or 3) pay as usual and consider the extra money as a raise for the current year only.

  • Communicate with your employees early and often. 2015 may be drawing to a close, but the extra day in 2016 means that employers need to communicate their plans for the coming year now. Get ready to forestall questions such as, “Am I working for free one day this year?”

If you’re worried about the ramifications of leap year for your 2016 payroll calendar, your PEO can help. They will answer any questions you have, make sure payroll practices remain compliant with state and federal regulations, and safeguard compliance with contracts and offer letters. 

If you need extra help with your payroll this year, consider partnering with a PEO. Find the perfect match for your business with our state-of-the-art PEO matching tool.