Creating a Payroll Lag

Our organization currently runs payroll in real time, with no lag for processing.  So the pay period end date is also pay day.  (I know what a nightmare for retro-active processing!)  For a multitude of reasons, the organization is now looking at creating a 1 week lag for payroll processing.  We are concerned about employee's ability to absorb this, especially in the current economic situation.  We have floated several ideas to ease the burden on employees during this adjustment:  loaning the money with a repayment schedule over several months, holding the money as an account receivable and collecting it upon termination...  Any other suggestions would be welcome!


  • 2 Comments sorted by Votes Date Added
  • This is an "outside the box" idea....First of all, keep your workweek/payweek the same. For instance say your workweek is Friday 5:01pm - next Friday 5:00pm...your current pay date is Friday.  Assuming you pay weekly, adjust the paydate out 1 date in advance each the employees get paid this Friday and then 8 workdays later on Monday, then the next paycheck they would get on Tuesday, until you get to a processing time that you feel comfortable with. For all four of my companies, I have 5 work days to process payroll and generally have it done by the close of the 2nd day (mostly due to late data issues rather than actual processing time)....but really only 3 when you take into account direct deposit send file limits.

    Publish the new schedule at least a few weeks in advance...personally I would give at least 30 days notice AND stuff pay envelopes with reminders on when the next payday will be.

     This keeps the DOL/state labor group happy because you aren't continously changing your workweek which they do frown upon. 

    CAVEAT: You need to check your state laws to see the time frame that you have and whether this option is even doable....


  • Here's a quick summary of what we did at my company.  Keep in mind however, we are a defense contractor and have to comply with DCAA auditors and F.A.R. requirements.  Reconcillations cannot realistically take place in real time, so we decided to move to a "two week in the hole" scenario.  We started by letting new folks coming in have a two week lag before getting paid.  This aalary bank allows for covering any separation costs when they do leave (company equipment, cell phones, laptops, advanced leave, etc.) if we have problems collecting those items.  Also, allows our accountant to reconcile books in a good timeframe.   

     Acutual Payroll Conversion

    Here is what we did:

    In our case we pay on the 1st and 15th----Keep whatever schedule you have the same.
    Payroll pay dates remain as is:  1st and 15th of each month.

    Step 1:  Employee signs a Promissory Note to pay back two weeks (one payroll cycle) of net pay with the following options (keep the notes in personnel file):

    ·         Option 1—No net pay in one payroll cycle

    ·         Option 2 – Repay two weeks worth of net pay over 4 pay periods

    ·         Option 3- Repay two weeks worth net pay over 6 pay periods

    Step 2: Human Resources executes the selected option starting with the X date payroll.  Provide at least 45 to 60 day notice and education on this process.  

    Step 3: Accounting books the adjustments accordingly, now showing the affected employees

    Net result: 

    ·         No advances to employees from Company (Preserves cashflow)

    ·         No confusing timing and cycling issues

    ·         Employee selects a repayment plan that is comfortable for them during the cycle selected

    ·         Offers employees an option to suspend their 401K deduction contribution temporarily (for the period of repayment selected) so that there is little to no net effect to their regular net pay

    Special notes: You will have to work with your payroll company to ensure whether your accountant wants to set this up a a taxable event on payroll, etc.  You are essentially making a regular payment for the net amount the employee would receive on thier current paycheck, but it's considered a company advance of pay, which is repayable back over the schedule the employee has selected in advance.  You may need to set up a special payroll category to capture this payment and track it for EOY purposes on the affected employees.  We converted about 50% of the workforce to fall in line and in synch. 

     Good luck and hope this helps.

Sign In or Register to comment.