Salary Payroll Conversion from Bi-weekly to Semi-monthly Mid-year

Question

My company changed payroll from bi-weekly to semi-monthly mid year The last bi-weekly pay period before conversion ended on 9/7/2014. The first semi-monthly pay period started on 9/16. A pay check was issued on 9/15 that was supposed to address the gap, but their math seems wrong. Here is how HR explains the calculation:

**BEGIN EXAMPLE

Consider your pay on an annual basis. If you make $120,000 a year: • Your biweekly (26 pay period per year) pay is: $4615 per pay period (gross) • Your semi-monthly (24 pay periods per year) pay is $5000 per pay period (gross) We have had 18 Biweekly pay periods this year (through 9/7/14), so you’ve already received: $83,070 ($4615 X 18 pays) We will have 7 remaining semi-monthly periods this year (starting 9/30/14), so you will receive $35,000 ($5000 X 7 pays) The total of those two is $118,070 That leaves a gap in your annual pay of $120,000 - $118,070 = $1930. The pay on the 15th is that $1930 gap. This makes you whole for the whole year.

**END EXAMPLE

I don't agree with their reasoning. If we had never switched to semi-monthly pay period, the final pay in 2014 would include the days worked until 12/28/14. We would have earned our annual salary for work done between 12/30/2013 and 12/28/2014. To make us whole through 12/31/14, pay must include what we would have expected to get using the previous bi-weekly amount for the year (which is through 12/28/14) AND the 3 remaining days in December. THEN, the next payroll year starts on 1/1/15 under the new system. The attached example does not take into account the 3 remaining days of the year (12/29 – 12/31).

This is the example I sent to HR, and I have not heard back yet:

Let’s say that the conversion from bi-weekly to semi-monthly happened after the last bi-weekly paycheck of this calendar year. The last bi-weekly paycheck would include pay through 12/28/14. The next pay period is semi-monthly and would be from 1/1/15 to 1/15/15. The “gap” here is much easier to see. Employees get their annual salary through 12/28/14, but the new annual salary starting date becomes 1/1/15. The work performed to get to the annual salary amount includes a year of working hours from 12/30/2013 through 12/28/2014. Notice this includes days from 2013. Again, the three day gap can be seen until the new pay period is started in 2015. What is the correct way to do this conversion?

Answer 1

If you were being paid biweekly and the amount was calculated by dividing your advertised annual salary by 26, then you were being overpaid as there are slightly more than 26 two week periods in a year, so on average you'd receive 1/364th extra per year (and 2/364ths in a leap year).

With the switch to bimonthly pay that overpayment is being withdrawn, which explains at least part of any discrepancy you can calculate. The earlier the switch the more you lose out.

As @JoeTaxpayer points out, you also lose out for February 29th; in the old system you got paid for it, and in the new system you don't. But that's a natural feature of an annually-defined salary.

Answer 2

Ganesh is correct about the slight overpay. I don't think you can legally claim that because of bad bookkeeping you should get to keep the extra pay.

You were paid for 18 pay periods. If you look at the date 36 weeks before 9/7/2014 You can see that the first pay period of this year actually started last year. So some of that money you were paid in the first pay period was for work done last year. You can find 3 extra days that you are not being paid for at the end of last year.

From my understanding do have a right to this money. The error in their calculation is the assumption that the 18 pay periods started January 1st, which they did not. So they are taking into account salary from last year in figure 83,070. So in the extra paycheck they gave you they should have payed you $3,136 in order for you to have earned 120,000 by the end of this year (for work done this year). After this, the days at the end of this year are taken into account in the calculation they did.

So this is how I would calculate it. There are 249 days you were paid for this year. So you are still entitled to (365-249)/365*120000 ~ $38136. They are paying you 35,000 by the end of the year. So they owe you $3,136.

Answer 3

I think you could make a case that you are being slightly underpaid, but not for the reason you give.

Let me say up front that any transition plan for this situation is going to have some ambiguities. Assuming that you don't work weekends, then under a biweekly system each check is for 10 working days. But under a semimonthly system, the number of working days varies from 9 to 12. (It can be 9 for the second paycheck in February in non-leap years, 12 for the second check in 31-day months.) Exactly what is "fair" can be debatable depending on the placement of weekends. I suppose one could also quibble about holidays.

Anyway, you point out that under the old bi-weekly system, you wouldn't be paid for December 29 - 31 until the next year. But that's irrelevant. Their "gap" check is calculated to bring your total pay for the year to match the amount you were promised. The fact that under the old system you wouldn't have gotten some of the money until the next year isn't relevant. They're not calculating by subtracting the regular paychecks -- biweekly plus semimonthly -- from what the total would have been if they were all biweekly. They're subtracting from the promised total salary. That automatically adjusts for the change in the "end date". Or to put it another way, under the old system you would have been paid on December 28 for work done through that day, and the work you did for the last 3 days of December won't be paid until next year. But under the new system, on December 31 you are paid for work done through the end of the year, so there is no carryover.

Where I think you have a case, though, is that, if I am counting the weeks correctly, your first paycheck for the year would have been on January 12. That means it included pay for December 30 and 31 of 2013. So when they calculate your 2014 promised pay minus actual pay, the "actual pay" includes 2 days of 2013. So they are counting money you were paid for 2013 work toward your 2014 paycheck. In effect, under this transition plan you will not be paid for those two days in 2013.

Under the old biweekly system, in 2014 you would actually receive 26 checks covering the period from December 30, 2013 to December 28, 2014. Your first check of the year includes pay for 2 days in 2013. Your last check in the year does not include 3 days of 2014, for which you will not be paid until your first check in 2015. So your pay for the year is plus 2 but minus 3 equals 1 day short. Of course in other years you are paid for an extra day, so normally it cancels out long term. But with this transition plan, you lose the 2 days and never get them back.

I think a fair gap check would be calculated like this: You were paid under the biweekly system from December 30, 2013 to September 7, 2014. You will be paid under the semimonthly system from September 16, 2014 to December 31, 2014 -- presumably the first semimonthly check on September 30 covers work beginning on September 16. So the gap check should cover September 8 through 15, or 6 working days. There were 261 working days in the year (assuming I counted that correctly), so the gap check should be 6 / 251 * annual pay. In the case of the person making $120,000, that would be $2869, not $1930. The difference is basically the two days pay for the two days in 2013.

Another way to calculate would be to take $120,000 x (261 + 2) / 261, i.e. to figure your salary for the 2 days in 2013 plus all of 2014, and then subtract from this the amounts paid under the old biweekly plus the new semimonthly. Let's see, that gives $120,920, minus $83,070 minus $35,000 equals $2850. Difference basically being due to rounding error between counting work days and calendar days plus and the rounding to nearest dollar.

Personally, if I was going to make such a transition, I would have picked a date when the end of a biweekly period coincided with the end of a semimonthly period. Assuming the earliest possible date is September 7, as that's when they made the actual changeover, November 30 would have been a good choice.