A payroll cycle is the systematic process your organization follows to calculate and distribute compensation to its employees.
What constitutes a pay cycle for your organization could be different for other organizations. This is because payroll cycles encompass all the steps involved in managing your employees' wages (or salaries), deductions, benefits, and any other related payroll transactions within a specific time frame.
This time frame typically repeats itself at regular intervals based on your chosen pay frequency; that’s why it is called a cycle. Common cycles used by most organizations include weekly, bi-weekly, semi-monthly, and monthly.
Why should HR leaders care about payroll cycles?
The dynamics of an employee-employer relationship are delicate; if one party does not fulfill its responsibilities, the relationship breaks down.
Your organization carries out a significant part of its responsibilities by paying people regularly and on time.
When you default on a pay cycle, employee financial anxiety rises. It’s already been found out that 72% of employees will experience financial difficulty if their paychecks are delayed by a week.
When your organization carries out its obligation to pay people on time (and accurately too), employee satisfaction, tax compliance, and financial transparency all experience a boost.
None of these is possible though, unless you have a nailed-down process for paying employees. That is why your organization must achieve clarity with its pay cycle.
How do you determine your payroll cycle?
You read at the beginning of this article that a payroll cycle encompasses all the steps involved in managing your employees’ payroll.
We also mentioned that what constitutes a payroll cycle for your organization could be different for other organizations.
This is because payroll cycles are determined by a combination of factors that balance the needs of your employees, your organization’s operational efficiency, and compliance with regulatory requirements.
These factors are looked at below.
Your organization’s policies and culture
Your organization’s culture plays a role in determining the structure of your pay cycle.
If your organization prioritizes paying its employees more frequently to align with its values of prompt compensation, your pay cycle would reflect it.
Frequency of work and cash flow
The frequency of work performed by employees is a big determinant of how your pay cycle is structured.
For instance, if the work performed is irregular and project-based, it makes more sense to consider a more flexible and shorter pay cycle.
Your organization’s cash flow also plays a part in how frequently you run payroll. You can’t adopt a weekly pay cycle if you do not have enough funds to cover payroll in between cycles.
Certain industries have common payroll cycle practices. For instance, construction or hospitality industries might lean towards weekly pay cycles due to the nature of the workforce.
This is something to take into consideration, especially if there is a union agreement involved.
Sometimes, choosing a pay cycle that works is as simple as asking what your employees want. Some employees might prefer frequent paychecks. Others might prefer monthly pay to align with their bills and expenses.
Administrative efficiency and cost management
Smaller organizations might opt for less frequent pay cycles to reduce their administrative burden while larger organizations, with bigger resources, might have the capacity to manage more frequent payrolls.
The bracket your organization falls into should influence how you think about your payroll cycles.
It is also important to consider payroll processing costs (in terms of administrative time and software fees). A frequent cycle could mean higher costs. To move forward, you must determine if the cost is worth it.
Compliance with tax and benefits deadlines
Tax deadlines and benefits contribution schedules can also impact payroll cycles. It is important that you align pay cycles with these deadlines to ensure accurate reporting and compliance.
Your organization’s payroll software and technological capabilities also play a crucial role in how easily and accurately your payroll can be processed. An advanced system can accommodate any pay cycle that you decide is best for your organization.
What are the types of payroll cycles?
Pay cycles are characterized by pay frequencies. The common types of payroll cycles are:
- Weekly payroll cycle
- Bi-weekly payroll cycle
- Semi-monthly payroll cycle
- Monthly payroll cycle
Weekly payroll cycle
A weekly pay schedule allows employees to receive their paychecks every week (resulting in 52 payments each year). It is favoured by employees that rely on consistent cash flow.
On the other hand, it tends to cost more for companies because of the need to process payroll more often. It also requires more time commitment.
Bi-weekly payroll cycle
Here, employees are paid every two weeks, resulting in 26 pay periods in a year.
For employees, this arrangement can help them feel more secure as they get paid on a set pay date as opposed to a set payday (which can be on any day).
For HR professionals, it is easier to calculate overtime pay as your overtime is based on a workweek.
Semi-monthly payroll cycle
For a semi-monthly payroll cycle, your employees are paid twice a month, often on specific dates such as the 15th and the last day of the month.
This equals 24 pay periods but paydays don’t always fall on the same day of the week.
Monthly payroll cycle
A monthly payroll cycle allows employees to get paid once a month, typically on the same date each month. Monthly pay cycles offer administrative simplicity but might require employees to manage their finances over longer periods.
What can HR leaders do to maintain an effective payroll cycle?
We like to compare maintaining an effective payroll to being a conductor in an orchestra.
In both cases, it is your responsibility to ensure that everything runs on time and together.
This requires accurate data management, clear communication, compliance vigilance, precise calculations, and of course, timely processing.
Key to all of this is a centralized payroll system that securely displays your employees’ names, bank details, and any other relevant payroll information.
This data can then be accessed by your organization’s HR, payroll, or any department involved in the disbursement of compensation to your workforce.