Organized Bookkeeping

What is an Appropriate Lag Time for Payroll?

When companies first set up payroll, they rarely think about the payroll lag time.  Of course it can be done immediately!  Why wouldn’t they?  Employees need that money now!

Then the reality sets in:

  • The bookkeeper had the flu.  Then the office manager had to do the payroll for her.  Three pay periods in a row.  The office manager is looking a bit tense as the next payroll approaches.
  • Then an employee was out of town and didn’t send in their time cards.  Oh Boy, they had to void a check and reissue it.  That was a mess.
  • Then someone suddenly quit and expected their accrued vacation to be paid within a day or so.  That blew a hole in the cash flow budget.
  • Then there was that complicated project that required a lot of data entry.  The bookkeeper was up until midnight for that pay period.

These are some of the sample things that can go wrong with any payroll.  It’s common that at least one payroll will go south each year.  People get sick, they forget to turn in their time cards, or accrued vacation needs to be immediately paid.

When you are setting up the payroll lag time; you are setting your own deadlines. (The time between the final time card and the day that payroll is paid.)  The employees take payroll disbursements very seriously.  The best way to encourage employee mutiny is to be a day late for payroll.  This high expectation put considerable strain on the payroll department.

If you have a ridiculously short payroll cycle, say a day or two, it ensures that employees will be extremely unhappy with the company once or twice a year.  Why not create a system that makes them happy instead?

  • Ensure that there is adequate time for employees to turn in their time cards.  A day or so.  Remember you have them assigned to other tasks, so they should have a few distractions.
  • Online Time Cards.  If you use online time cards, make sure they all have access to a computer with internet access.  If they have to log on at the library each pay period, they might be cranky.  And not everyone has a computer.  Make a few available for employees.
  • Allow two days for the bookkeeper or payroll clerk to process the paychecks.  It gives them more time to follow up on any strange issues or to have managers sign off on overtime.
  • If you need a manager to approve payroll, create a system where they can approve it over the internet.  In today’s mobile work places our approval processes need to be modernized.
  • Have an established procedure written up for payroll.  Put appropriate information in the Employee Handbook.  Distribute that Employee Handbook.

The payroll lag time should be a week or less.  Anything more and employees get grumbly.  But if you do adequate planning and make sure you have established procedures; it makes employees feel happy that they can count on that paycheck each pay period.  Don’t create a system that causes chaos and confusion for your staff.