There is an unusual wage issue for 2015 that will affect many employers that pay exempt employees on a bi-weekly basis (rather than weekly, semi-monthly or monthly).
It is an issue that may have both financial and legal repercussions.
And it is an issue we suspect many employers had not noticed or considered.
With 52 weeks in a year, there normally are 26 bi-weekly pay periods in a calendar year. In 2015, however, there will be 27 for many employers.
This oddity occurs every 11 years. In short, it happens because 26 bi-weekly paychecks only cover 364 days in a year, not 365 (or 366 in Leap Years). Those extra one or two “unaccounted for” days add up to create an additional pay period every 11 years.
The extra pay period is more than just an oddity. It raises a dilemma for those employers that pay exempt employees on a bi-weekly basis – either pay employees more than intended, or face a possible wage payment claim.
If an employer were to pay exempt employees the same amount in each bi-weekly paycheck in 2015 as in 2014, it would effectively give each of those employees two additional weeks of pay in 2015. Or, to put it another way, it would effectively give each employee a 3.846% raise for 2015.
By way of example, if an employer has agreed to pay an exempt employee a salary of $100,000 per year, it would have paid him or her $3,846 in each of 26 bi-weekly paychecks in 2014. But if it pays the employee that same $3,846 in each of 27 bi-weekly pay periods in 2015, it would end up paying the employee $103,846 in 2015 – not the $100,000 salary it had agreed to pay.
And that would be true of every exempt employee paid in that manner.
As you can see, depending upon the number of exempt employees an employer has, this could have a substantial financial impact. And it could create budgeting and cash flow issues for some employers whose payrolls could increase significantly and unexpectedly.
If, instead of keeping the amount of each paycheck the same as in 2014, the employer were to reduce slightly the amount of each paycheck in 2015 – paying the employee discussed above $3,703 per paycheck rather than $3,846, such that his or her compensation in 2015 would total $100,000 — not only might there be morale issues, but there could be legal repercussions.
Depending on the amount of the resulting payment, the salary requirement for an employee’s exemption might no longer be met. That would seem to be require an individual-by-individual analysis.
Just as importantly, it is possible that employees will claim that they have not been paid everything they are owed for work already performed or that their contracts have been breached, bringing wage theft claims in court or before a government agency.
At this time, there does not appear to be any case law, regulations or other guidance directly addressing this unique issue. That is not entirely surprising as the last time this issue arose was in 2003, when the wage-hour climate was very different than it is now. In the time since, we have seen massive wage-hour class actions, the passage of wage theft statutes, and a heightened focus on wage theft issues by government agencies. As a result, any employer who choses to reduce exempt employees’ bi-weekly paychecks in 2015 to address this issue should be aware that such a decision may be challenged, perhaps even in a class action lawsuit.
In making this decision and assessing the risks, employers should start by looking at employees’ offer letters, contracts or other documents setting forth their compensation. If they provide for a specific amount to be paid bi-weekly, then there would not appear to be any choice to be made – it would seem clear that the specified amount should be paid in each bi-weekly paycheck, even if there is an extra pay period in 2015. But if the offer letter or contract provides instead for the salary to be paid on an annualized basis, the employer will then need to weigh the risks of the approaches discussed above, or perhaps consider switching to semi-monthly paychecks.