Look before you leap: the impact of the leap year on payroll

The leap year was first invented by the Roman emperor Julius Caesar in 45 BC, at a time when payroll was the equivalent of passing out handfuls of salt as payment to soldiers in the Roman army. In fact, the Latin word for salt, “salis”, is where we get the modern word “salary” from.

The art of payroll has come a long way since then, of course, but the leap year – which adds an extra day to February – continues to have an impact on how payroll calculations are made.

Today’s payroll professionals are constantly battling to stay up-to-date with highly complex and ever-changing regulations, to the point where it can be all too easy to forget an important event that only occurs once every four years.

So, how will the extra day in 2020 impact payroll calculations? Well, it all depends on whether the employees on your payroll are ‘salaried’ (meaning they are paid a fixed annual salary), or receive payment based on the number of hours they work.

In short, salaried employees aren’t affected by the extra day – since they are paid for the year as a whole, rather than the specific number of hours they work (which may vary week to week).

By contrast, employees who work variable hours (including on February 29) will be affected. More specifically it’s likely to impact employees who are paid the National Minimum Wage (NMW). If the extra day in February is not factored into payroll calculations, there is an increased risk of inadvertently underpaying individuals on average for the pay period in question – thus breaching compliance.

The Resolution Foundation reported, in January, that a quarter of NMW workers under the age of 25 have been underpaid, with HMRC identifying nearly £25m in underpayment for more than 220,000 workers.

Avoiding minimum wage underpayment

We know that payroll professionals hold very high standards of accuracy and efficiency, but the sheer complexity of the rules means that mistakes are easily made. In addition, a number of consultations on various NMW issues have taken place and we’re waiting the government’s recommendations, therefore further changes to the regulations may occur.

Unfortunately, the business ramifications are damaging in a number of different ways. For example, non-compliance damages employee trust and engagement, while there is also the possibility of facing penalties (which can be as much as 200 percent of the arrears) and even criminal prosecution.

It may be time for organisations to re-evaluate and update their current payroll processes in order to put stronger compliance measures in place.