February typically has twenty-eight (28) days. However, in a Leap Year—such as 2020—February sprouts a 29th day. That extra day can be a logistical headache for employers, because it can trigger an extra pay period for employees.   Whether your company is affected may depend on whether your payroll runs weekly, every two (2) weeks, or bi-monthly.  Regardless, in Leap Years employers should evaluate whether there will be an extra pay period for their employees and decide what action, if any, is warranted.

A.   Adjustments to Employees’ Paychecks

 If the Leap Year does, in fact, create an additional payroll period for your company, there are a few different options to consider:

  1. Do nothing and pay the same amount as usual for each payday. This typically results in a higher payroll cost due to the extra paycheck.
  2. Divide annual salaries by 53 weeks or 27 paydays. This will result in smaller employee checks each payday, offset by the extra Leap Year paycheck, which should result in yearly payroll costs remaining the same.
  3. Reduce the final paycheck of the Leap Year. This approach is less common because, depending on how much you have to reduce the employee’s pay, employers may run afoul of minimum wage or exempt, salaried rules under the Fair Labor Standards Act (“FLSA”).

According to HR consulting firm ERC, most employers (86%), do nothing and pay their employees as usual. While this option seems the most convenient, the total dollar figure employers will payout in salaries and employer payroll taxes will increase.  If the company decides to adjust each paycheck amount downward, understand that decreases in employees’ pay without sufficient explanation will generate a lot of questions from employees and may even negatively affect morale. Explaining to employees beforehand that their annual salary will come out the same despite slightly smaller paychecks for each pay period will help counterbalance any confusion.

It is also important to note that the extra Leap Year payday only creates issues for salaried, exempt employees whose annualized salary is spread out evenly over the pay periods.  By contrast, non-exempt, hourly employees are paid only for those hours actually worked; thus, there is no need to “average out” their wages over the year when faced with the additional Leap Year pay period.

B.   The Effect on Payroll Deductions

Employers should also consider the Leap Year effect on payroll deductions (which can affect both exempt and non-exempt employees). For instance, health plan premium contributions should, if necessary, either be adjusted to take into account the additional pay period or suppressed in the additional payroll period. Employees should also be advised how an extra pay period will affect their benefit contributions to 401(k) plans, health savings accounts (HSAs), and flexible savings accounts (FSAs). A similar consideration applies to special wage deductions that are performed every regular payroll period, such as court ordered garnishments or a loan repayment on a wage advance.

Tax withholding is typically calculated using a set of predetermined tables from the IRS and corollary state tax agencies. However, in a Leap Year with an additional payroll period, employers should ensure that automated payroll systems adjust tax withholding to reflect the additional payroll period. Employers should also ensure that their electronic time-and-attendance, Paid Time Off, and recruiting systems are correctly programmed to recognize February 29th as a valid day.

C.   Other Leap Year Considerations

  1. Social Security and Medicare. The amount of wages will affect the total Social Security and Medicare you and your employees’ pay. Some employees may reach the maximum Social Security contribution earlier and may reach the      threshold for the additional Medicare tax if you make an additional payment. While this may be unavoidable, employers should advise employees of this side effect of having an extra pay period.
  2.  Tax Year for W-2s. Having a pay period extend over the end of a year brings up the issue of which year’s taxes the payment is in. The general rule is that the tax should be on the W-2 for the year when the paycheck is issued, and the employee has use of it.

D.   Key Takeaway for Employers

The potential Leap Year impact on employees’ wages, benefits, and taxes might seem daunting.  However, with a little advance planning, employers can easily decide which approach would best fit their organization and, most importantly, communicate that approach to their workforce so that you don’t waste time on the back end explaining to employees why their paychecks look different.  But no matter what route you choose, DO NOT just skip a paycheck – that approach likely violates federal and state wage payment laws.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.