The next leap year does not happen until 2016, but for employers with salaried employees paid on a weekly or bi-weekly basis, 2015 may be a "payday leap year." Practical Law reached out to Thomas Bright of Ogletree, Deakins, Nash, Smoak & Stewart, P.C. for his thoughts on what employers need to know about payday leap years.

Mr. Bright is a Shareholder in the Greenville, South Carolina office of Ogletree Deakins and has been practicing management labor and employment law for 33 years. He has handled wage and hour issues ranging from simple advice on what should be included in the regular rate of pay to complicated class and collective litigation in a variety of settings, including both private and public sector employers.

For employers whose salaried employees are paid on a weekly or bi-weekly basis, 365 days in a year is not evenly divisible by seven or 14. So, in a 365-day year, there are either 52 or 26 paydays, but in both cases there is an extra day "left over." In leap years, there are two days "left over."

Over the course of five to six years (for weekly payrolls), this anomaly results in the accrual of seven additional days. For bi-weekly payrolls, the anomaly occurs once every 11 years. Thus, theoretically, salaried employees who are paid once a week or once every two weeks are arguably entitled to an extra paycheck once every five to six years (weekly pay) or every 11 years (bi-weekly pay).

For employees paid by the hour, this anomaly is not an issue because they are paid for each hour they work. The number of days or paydays in the year does not make a difference. The issue also does not affect employees paid on a monthly or bi-monthly basis.

However, employers cannot avoid the accumulation of "left-over" days each year for salaried employees paid weekly or bi-weekly. Failure to address this issue correctly could result in legal issues under both the Fair Labor Standards Act and the applicable state wage payment laws.

This is all a product of when the employer issues the first paycheck in 2015.

If the employer issued its first paycheck of 2015 on January 1, a 53rd or 27th payday will occur on December 31, 2015.

Similarly, if an employer issued the first paycheck of 2015 on January 2, and its payroll policy provides that when paydays fall on a holiday, employees will be paid on the previous business day, a 53rd or 27th payday will occur on December 31 because of the January 1 holiday.

For salaried employees, their salary is ordinarily divided by either 52 or 26 paydays and W-2 income for employees for the year will be their stated salary. So, the issue is how employers calculate and pay salaries in a year with 53 or 27 paydays.

The first option is to do nothing and continue to pay the same amount for each payday, recognizing one extra paycheck in the year. The consequence of this approach for employers is a significant increase in payroll costs for the year. In addition, W-2 income is generally reported for the year the employee receives the income, not necessarily when it is earned. So, for example, wages received by a paycheck dated January 1, 2015 are taxed in 2015, even though the wages are for work performed the last week (or two weeks) of December 2014.

Employers should also consider the possible impact on employer and employee benefit contributions. For example, employees contributing a percentage of each paycheck to a 401(k) or flexible spending account program are limited by annual caps. An extra paycheck may result in negative tax consequences if those caps are exceeded. Employers should ensure their payroll and benefits departments make the appropriate adjustment to payroll deductions and benefits contributions.

The second option is to divide annual salaries by 53 or 27 paydays. This will result in a reduction in the amount of the employee's check each payday, but the reduction will be offset by an extra paycheck at the end of the year. This means employees will be paid their regular annual salary, which is, after all, what they agreed to as their compensation.

However, employers must consider the legality of this second approach under both the Fair Labor Standards Act and the wage payment statute in the state where the employee works.

First, it is important to understand what the employee was told when hired or what is provided in any employment contract. If the employer stated that compensation would be based on an annual salary, the second option should not offend either the FLSA or any state wage payment statute. But if the employee was informed that they would be paid on a weekly or bi-weekly basis only, the employer may be stuck with the first option. However, typically, while employees may be told a weekly or bi-weekly amount to expect, that number is based on what they understand is their annual salary.

In addition, for the second option, the method and manner of payment is changed and many states require advance written notice before making such a change. Employers will need to inform employees of the change to 27 or 53 paydays for the year, meaning each paycheck will be reduced, but they will receive the difference in an extra paycheck. Employers should spell out in detail the annual salary, the number of paydays and the amount to be paid each payday. Employers should emphasize that employees will still receive their full salary for the year. This should satisfy the advance notice requirement under state law.

The FLSA is less of a concern. Employers may adjust an employee's pay so long as they continue to pay a guaranteed salary. Also, for exempt employees, so long as the salary satisfies at least the statutory minimum (currently $455 per week), it is otherwise guaranteed and employees are informed that their paycheck will be reduced slightly for the year, this adjustment (with an extra payday at the end of the year) should not adversely affect their exempt status under the FLSA.

Arguably, this is an impermissible deduction under the FLSA. However, I believe it is more in line with a permanent change for the year with no intent to change again until year end. It is not the same as, for example, an impermissible deduction for a half day's absence, which is applied on an ad hoc basis.

Employers should also consider:

Keep in mind that if the employer elects the first option, nothing is required. However, if the employer elects to pay the annual salary over the balance of the year recognizing an extra paycheck at the end of the year, the employer must make sure to communicate this change in writing prior to implementing such a change.

Finally, employers should be aware that there do not appear to be any state or federal regulations governing payday leap years and employees may challenge the employer's approach. Any change of this significance will create employee relations concerns, so an employer's ability to "sell" the program will be critical.