As Payroll staff start planning for year-end, one step in this process is to map out the coming year’s payroll schedules. When looking at these, particularly if you pay on Fridays, you will quickly see that January 1, 2016 – New Year’s Day – is a Friday.
So what to do if that day would otherwise be one of your bi-weekly or weekly pay days?
Generally, it’s understood that if pay would otherwise be due on a statutory public holiday, a Saturday or a Sunday, it’s shifted to the prior business day, usually meaning a Friday. However, is this a legal requirement?
The only jurisdiction where this is a requirement is Québec. Under the Québec Employment Standards, if Friday, January 1, 2016, would otherwise be a pay day, you must move the pay to the prior business day, December 31, 2015. Below we’ll consider the implications.
All Other Jurisdictions
For all other jurisdictions, there’s nothing to prevent an employer from taking a pay that would otherwise fall on a statutory public holiday and shifting it to the next day, either Saturday or the next business day, which would usually be Monday.
Most jurisdictions have rules as to when employees must be paid. These rules define the gap between the last day in each pay period and the corresponding pay day. These gaps range from a low of 5 (NS, PEI) to a high of 10 days (AB, MB and the 3 Territories).
For Example: If a Nova Scotia pay period ran from Monday, December 14 through to Sunday, December 27, 2015, inclusive, the 5th day following would be New Year’s Day, January 1, 2016.
You might think this would prevent a Nova Scotia employer from shifting this pay date forward to the next business day. However, that’s not the case. That’s because when something is due on a public holiday, you’re allowed to meet that requirement on the next business day. In other words, despite any rules around the gap between pay period end dates and the corresponding pay days, when pay would otherwise fall on a statutory holiday, employers (except in Québec) are permitted to move those pays forward to the next pay day.
So where it’s permitted, should you move a pay day, otherwise due on January 1, 2016, backward into 2015 or forward to the next business day in 2016?
Moving a Pay Back Into 2015
First, let’s look at the implication of moving a January 1, 2016, pay back into 2015.
1) A Higher Income Tax Bracket?
If a January 2016 pay is shifted back into December 2015, that might mean a higher income tax bracket is applied. For example, the additional 2015 pay might raise the employee into the 22% federal income tax bracket from 15%, when this wouldn’t otherwise be required. In effect, this would be shifting taxable income from 2016, back into the 2015 tax year. However, any such effect would be limited to the taxable income on the pay shifted back into 2015.
2) CPP or QPP Maximums
For employees not already at the YTD maximums for CPP or QPP, any basic exemption applied to the extra pay in 2015 would trigger a PIER assessment. If January 1, 2016 is a bi-weekly pay day, this means there are otherwise 26 bi-weekly pays in 2015 (January 2, 2015 to December 18, 2015). If this was the basis on which CPP or QPP has been calculated in 2015, and an extra bi-weekly pay (that for January 1, 2016) was added, the bi-weekly basic exemption for 26 pays, $134.61, would have been applied 27 times. This would be a failure to withhold and remit the correct amount of CPP or QPP.
3) Annual Taxable Income
A similar problem would happen in the conversion of periodic to annual taxable income. Under the regular, periodic method, when there are 26 pays in the year, pay period income is multiplied by 26, to give an estimate of taxable income for the year. If this factor – 26 pays in the year – is used in 27 income tax calculations, annual taxable income will have been understated. If bi-weekly gross is $2,000, over 26 pays an employee has $52,000 in taxable income for the year. If a 27th pay is processed in 2015, using this same conversion rate, annual taxable income remains at $52,000, when the correct amount should be $54,000. This would be a failure to withhold and to remit the correct income tax.
The two previous effects, however, don’t apply if this situation had been anticipated prior to the start of 2015 and that year’s source deductions calculated on the basis of 27 pays.
Moving a Pay Forward In 2016
What then are the implications of moving a January 1, 2016 pay to either January 2 or 4, Saturday or Monday, respectively?
The main implication is that employees might find it more disruptive to be paid 1 (Saturday) or 3 days (Monday) later, rather than 1 day early (Thursday).
You’re going to have to judge for yourself, if this situation applies, whether its better to minimize any impact on employees or deal with the consequences of moving the January 1, 2016 pay back into 2015. As described above these might be PIER assessments for employees who haven’t yet hit the 2015 YTD maximums, as well as potential employee complaints that not enough income tax had been withheld for 2015.
Since moving the pay date forward to the next business day has a more immediate, visible impact on employees, I suspect most payroll professionals would opt in this situation to move any January 1, 2016 pay back into 2015.
This post was originally published on Alan McEwen's Canadian Payroll Consulting blog.
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