Leaping Through 2020 - Facing the Payroll Challenge of a February 29th

Like the Olympics, a leap year comes every four years.  Though it may not feel like it, each of us gets an extra day in the year.  For those of us who feel like there are never enough hours in a day, February 29th may be a welcome bonus day.

But for employers, there is a special consideration that may be taken for granted.  If you pay your employees on a bi-weekly basis, February 29th, in all of its glory, brings with it the possibility of 27 pay periods rather than the usual 26, depending on when your pay periods fall. 

I Was Told There’d Be No Math

You may only think about a leap year as having 366 (vs 365) days in the year, but there is more to the leap year calculation.  It’s also important to note how that 1 extra day impacts the rest of the calendar year.  While you know February 29th is a Saturday, what you may not know is that there are 53 Wednesdays and 53 Thursdays in 2020, vs the 52 of each there were in 2019.

So, do you owe your employees an extra pay installment?  Typical lawyer answer:  IT DEPENDS.  As a lawyer, math is not always my strong suit, but if your regularly-scheduled weekly or bi-weekly payday falls on a Wednesday or a Thursday, you will see an extra payday in 2020.  With that said, here are some answers to employers’ most pressing leap year payroll questions.

Hourly-Rate Employees: Pay As Usual

Perhaps disappointing news to some, but there is no “leap year effect” for hourly-rate employees.  Hourly-rate employees are paid for each hour of work they perform.  Although these employees may have the opportunity to work an extra day because of February 29th, their pay will reflect the actual hours they worked in the pay period.

Salaried Employees

A.    More than an Extra Day

When it comes to salaried employees, an employer’s first step should be to look at its employment agreements, and their payroll schedules.  If the agreements provide that the employee is compensated on a bi-weekly basis (a.k.a., every 2 weeks) instead of an annual basis[i] (e.g. “You will receive $3,000.00 bi-weekly less all statutory deductions and remissions…”), then employers are required to continue to pay the employee’s regular wages at the same level on a bi-weekly basis (in accordance with the employment agreement), and the employee may[ii] receive an extra paycheque and more money in 2020 than in 2019 or in 2021.  For example:

2019 – 26 bi-weekly pay periods                         2020 – 27 bi-weekly pay periods

$3,000 bi-weekly x 26                                             $3,000 bi-weekly x 27

=$78,000 total salary                                               =$81,000 total salary

“Bonus”?  Not really.  Employers are simply paying their employees in accordance with the written terms of their employment.  That said, best practice suggests that you communicate with your employees – in writing – to provide advance notice of why the change is happening. Let your employees know that they are receiving an extra pay because of the change in the calendar year (and the additional pay period), not as a result of any increase in their contractual rate of pay, and that there will be a return to 26 bi-weekly pay periods in 2021.

B.    Being Divisive

If, however, the employment agreement provides that the employee will receive an annual salary, say of $60,000, and that salary is simply to be paid on a bi-weekly basis, the employee is not compensated based on the time that they work in each pay period (like an hourly-rate worker is). 

Behind the scenes, the payroll administrators/providers convert the annual salaries to a pay period amount based on the number of pay periods in the year.  In the case of a change from 26 to 27 bi-weekly pay periods, the practical, and technically correct result, is that the employee’s gross pay will be reduced in each pay period in 2020 versus what they saw on their 2019 pay statements. 

2019 pay $60,000 of annually                                    2020 pay of $60,000 annually

$60,000 / 26 pay periods                                     $60,000 / 27 pay periods

= $2,307.69 per pay period                                     =$2,222.22 per pay period

$60,000 total salary                                               $60,000 total salary

The employer, in that case, will be in compliance with its contractual terms to the employee since even though the employee will receive a little less each pay cheque, they will receive an additional pay cheque.  At the end of the year their total compensation in 2020 will be in line with their agreed-upon entitlements. 

Again, it is a good idea to provide notice of the change to your employee(s) ahead of time so they are alerted to the reduction in their bi-weekly pay throughout 2020.  The written notice should emphasize that the employee will still receive their full salary for the year.  This will minimize the number of questions (or complaints) you receive from employees that there is something wrong with their pay, and help them to manage any commitments they have themselves for regular bill payments, etc.  In the event an employer has not already adjusted the bi-weekly gross pay amount in 2020, it may still do so with notice to the employees of the future change.  Again, the key is to remember that the employee’s total annual compensation is equal to their contractual entitlements.

C.     You get an extra pay, and you get an extra pay!

If there is no written employment agreement or contract with the employee, it is arguable that the company has a practice of providing the employee with a regular rate of pay on a bi-weekly basis.  The decision as to whether there is a breach of the employment terms by reducing the amount of each bi-weekly pay (though providing the 27th pay) will be fact-specific.  The company could argue that while there was a regular amount paid bi-weekly in 2019, this was on the general understanding between the parties that their pay was based on an annual salary.

Of course, the company may elect to take the “Oprah” approach and provide the “extra” to their employees.  In this case, the employer would continue to pay the same amount on each bi-weekly pay day in 2020 as was paid in 2019.  The consequences are an increase in the payroll of the company for 2020.  In addition, depending on the terms of the written employment agreements, there may be an impact on employee and employee benefit contributions arising from the additional pay.  For example, employees who contribute (or who receive an employer contribution) a percentage of each pay to a group RRSP or pension will receive an additional contribution (so long as there are no cap issues). 

Not to sound like a broken record, but if you do elect to proceed in this manner, written notice should be provided to the employees in advance.  The notice can be messaged along the lines of the “generosity” of the employer or your good faith decision for the year.

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Regardless of the option chosen, communication to employees is key to ensuring everyone is on the same page.  We recommend sending a notification with the 2020 T4 statements to remind employees. 

And remember, you don’t have to worry about this again until 2024!

[i] Don’t even get us started on bi-monthly payroll, and the confusion that Merriam-Webster has inserted into that discussion.

[ii] Again, consult with your payroll department or representatives to be sure.