Loading 9 Votes - +

Paid Twice a Month vs Every Two Weeks

I’ve been exposed to two payroll systems: the once-every-two-weeks kind and the twice-a-month kind. Each has its own nuances and quirks, but only recently did I realize how they could impact my personal finances in dollars, not just monthly planning differences. Before moving into my tale, however, allow me to comment on the two systems.

When employees are paid every two weeks, there are 26 nice and equal payments. The issue is sometimes there are three payments in a month, and sometimes only two. To get around this, there is the twice-a-month payment system, which includes 24 (again) equal payments, but this time on an uneven timing basis (i.e., on the 15th and the final day of the month). In the former, you have to deal with being paid different amounts in different months, but your effective hourly rate is always the same. In the latter, you make the same amount every month, but your hourly rate changes.

Which system is better depends on your angle. As an employer, running 24 payrolls is likely cheaper than running 26. As an existing employee, the twice-a-month method might be easier to use in planning if you do not live within your means (i.e., live paycheck-to-paycheck) or can’t do simple multiplication (i.e., every-two-weeks paycheck amount * 26 / 12 = monthly income). As a new or leaving employee, well … that’s where you run into problems.

Take me, for example. I recently changed jobs – from an employer that pays once every two weeks to one that pays twice a month. Unaware of the payroll intricacies or how such might impact me, I was surprised by my first paycheck. I had worked exactly two weeks, but I had been paid less than 1/26 of my salary. Why? Because I started in the midst of a long pay period, of course. (Yes, that’s sarcasm.) You see, some half-months have more work days than others. If you prorate 1/24 of a salary over a longer period, the effective hourly rate is less than doing the same over a shorter period. And not just a little less, either (depending on the half-month, of course). Let’s compare, shall we?

Given a certain yearly salary ($YS), the resulting average hourly rate is:

average_hourly_rate = $YS / (40hours/week * 52weeks/year) = $YS/2080

Being paid every two weeks jives with this just fine. Paychecks would always be the same amount spread over the same number of hours:

two_week_pay = hours_in_week * average_hourly_rate = 80 * $YS/2080 = $YS/26

Or:

two_week_pay = 2 * weekly_pay = 2 * $YS / (52weeks/year) = $YS/26

When paid every half-month, however, the rate depends on the number of hours in the half-month. For example, in 2007, there are nine working days in the half-month from February 16th to 28th, resulting in a total of 72 working hours. From August 16th to 31st, however, there are twelve working days, or 96 hours.

Let’s look at just how much these differences affect how much you would be paid for 80 hours of work. In the first case (72 hours), the hourly wage and payment amount would be determined as follows:

hourly_rate_1 = bi-monthly_payment / hours_1 = $YS/24 / 72 = $YS/1728
payment_for_80_hours_1 = 80 * hourly_rate_1 = 80 * $YS/1728 = $YS/21.6

Contrast this with the same calculations for the second case (96 hours):

hourly_rate_2 = bi-monthly_payment / hours_2 = $YS/24 / 96 = $YS/2304
payment_for_80_hours_2 = 80 * hourly_rate_2 = 80 * $YS/2304 = $YS/28.8

Comparing these with my actual hourly rate ($YS/26) reveals the severity of the differences:

hourly_rate_2 / average_hourly_rate = ($YS/21.6) / ($YS/26) = 26/21.6 = 1.204
hourly_rate_2 / average_hourly_rate = ($YS/28.8) / ($YS/26) = 26/28.8 = .904

Thus, under this system, I could receive a temporary raise of over 20%, or a temporary pay cut of almost 10% – for no reason other than when I start work. That’s quite a swing (and quite a justification).

In addition to the two scenarios above (72 hours in 9 work days, 96 hours in 12 work days), 2007 has some half-months with ten work days (80 hours) and others with eleven (88 hours).

4_article_119_thumb_half-months

Table 1. Work hours in each half-month of the 2007 calendar year.

As luck would have it, I started on August 20th (in the midst of the 16th half-month) and was the witless victim of a 10% loss for those two weeks. How nice it would have been to have started on February 16th

Wait, what am I thinking? How nice it would be if employers would realize the injustice of the system! (That’s where I was going with this.) I don’t mind if a company chooses to use a bi-monthly payment period. As I explained earlier, I can see the benefits to personal budgeting and running fewer payrolls. However, when an employee is on the way in or the way out, why not pay him his average hourly rate? (Well, either that or only allow employees to start or end their employment on the half-months with exactly 862/3 working hours. You know, the ones that don’t exist?) I mean, it’s not as if the new guy or the retired/fired guy is going to get paid the same amount in that partial working period, anyway – so why insist on pro-rating according to the skewed hourly rate?

Similarly tagged OmniNerd content:

Information This article was edited after publication by the author on 21 Dec 2008. View changes.
Thread parent sort order:
Thread verbosity:
1 Vote  - +
One other option by Brandon

Another option for companies on the twice-a-month payroll would be to only have employees start or end their employment at the break between pay periods. In the end, however, although this is more realistic than my sarcastic crack in the conclusion about non-existent half-months with 862/3 working hours, I doubt it would be enforceable – particularly when dealing with the whole quitting thing.

This is why it is easier to outsource and employ children. They tend not to be able to do this sort of math and never realize when they’re being robbed. Also, they are not yet bitter at life and still work enthusiastically for treats and snacks unlike their older counterparts that want "money" and "benefits".

Maybe your employer does realize this and that is why they had you start the day you did.

hmmmm…

Refer to your contract – are you paid by the hour (ie, did the contract give you an hourly rate) or salary, or was your pay rate never disclosed to you?

At some point someone set your pay rate, and I doubt that they gave you the equations that come out this way – you should write them a certified letter stating your salary or hourly rate that you were given when you first accepted the offer, and the terms under which it was offered (hourly or salary) and then tell they your were underpaid. You worked such and such hours, and they paid you less than you were told you’d be paid.

How they account for hours and how they pay you is an internal affair – but they should be paying you against what they offered.

Don’t wait, take them to task – otherwise you’re signaling your willingness to let them walk all over you, or your inability to monitor your paycheck.

-Adam

0 Votes  - +
HMMMM by Anonymous

my work just switched to the every other week method from the twice a month..

is it because it’s easier to fire people that way?

0 Votes  - +
Or... by Anonymous

What’s wrong with once a month paychecks? That’s the only method that makes sense to me. Who thought up these other crazy ways to pay people?

I work for a company that pays it’s employees twice a month. The system is used to save the company money and time, rather than paying it’s employees every week or every two weeks. The hourly rate for our staff does not change, but everything about our payroll method is set up to be as cheap for the company as possible. There are two pay periods each month, one from the 1st thru the 15th and the other from the 16th thru the end of the month. We get paid on the 20th of the month for the first period and on the 5th of the following month for the second period. This forces you to watch the calendar, because some pay periods may have only 8 or 9 days and some may have as many as 11 or 12 depending on how your schedule falls on the calendar.

1 Vote  - +
26vs24vs12 by Anonymous

I recently switched to 26 pay periods and I have to say, it is annoying as hell. I know you mention budget, but 24 pachecks isnt just inviting to people who cannot live within their means. Rather it is inviting to those of us whose world revolves around monthly budgeting. ALL of my bills fall in the monthly cycle, so it only makes sense that my paychecks do as well. As it is I have to shuffle money between savings and checking in order to cover the mortage for one month, then shift it all out again the next month. Mortgage comes out on the 5th, but what happens when I don’t get paid until the 6th? My entire buffer is gone for 24 hours.
Ya there is the quirk for hourly employees. But for the most part it is better than being shorted part of your salary for months at a time, waiting for your 3 paycheck month to catch up that couple hundred dollars you are missing. (shorted since your month’s worth of retirement and SS are taken out of 24 paychecks).
Then you have the mess that is delegating paychecks, with 26 you have to micromanage everything, unless you fake a bi-monthly and use the extra for other stuff. What check goes to what bills and what investments? It is different every pay period.
I will take a monthly rotation on my paychecks over the jacked up mess that is 26 any day. Give it to me once a month, twice a month or whatever. No one runs their budget as 26 pay periods unless you are debt free and don’t use utilities. Monthly, that is how we are billed, that is how we should be paid.

so say a person starts on the 1st of october get’s 10 dollars an hour and works 41 hours…..the regular hours that person is supposed to work are 38. How much will this person be getting?

the reason many employers pay on the 15th and last day of the month rather than bi-weekly is to avoid the accounting hassle of keeping track of accrued payroll. If the final payday on a two-week payroll is five days before the end of a month, employers on an accrual system have to show an unpaid payroll liability on their balance sheets for the last four days of the month. This means collecting timesheets, and effectively running a third payroll for these four extra days, then reversing that in the next month.

My recommendation is to avoid living hand-to-mouth and build yourself adequate savings (what a business would call an “operating reserve”) equal to three months of living expenses so you can absorb some irregularity in paychecks rather than screaming out about injustice.

Finally, your suggestion of paying an average hourly rate violates the Fair Labor Standards Act.

Share & Socialize

What is OmniNerd?

Omninerd_icon Welcome! OmniNerd's content is generated by nerds like you. Learn more.

Voting Booth

Hottest Disney princess?

15 votes, 2 comments