# Hourly pay rate calculation between Recruiting and Payroll Systems

My recruiting system's pay rate calculation differs from my payroll system's calculation resulting in penny difference in actual hourly pay to employee.

How can I handle such to avoid payee confrontation/complication in the future?

Example, yearly rate is 45,000 and appears on the offer letter as such, along with a calculated hourly rate. The payroll software, when a 45,000 yearly salary is input computes a slightly different hourly rate.

Thus both systems calculate a slightly different total yearly salary when the successive hourly rates are used to calculate. This has caused employees, in some cases, to inquire as to where their penny is.

How do organizations typically alleviate the difference in calculation issue? Any suggestions?

• Just for clarity here, if there is 1 penny of rounding, and 2000 working hours in a year, does this mean the company is shortchanging employees by 20 pounds each year due to rounding? Commented Jul 3 at 8:14
• If so, that's simply not good enough. Each paycheque should use the correct calculation, and that is the one that appears in the contract. Commented Jul 3 at 8:20
• This makes a strong argument for an integrated system to handle this consistently. Commented Jul 3 at 13:16
• I have a hard time understanding the issue. Usually people are either paid a fixed amount (per week, month or year), or they are paid by the hour. How can you have both in the contract/offer? Commented Jul 3 at 16:23
• I am probably miss something. But how can you even reliable calculate between a yearly and an hourly rate back and forth? Not all years have the same number of work days. Not even all years have the same number of days. It is obvious to me that when I get paid a yearly rate then my hourly rate will be slightly lower in a leap year, because I will (likely) need to work one day of 8 hours more in a leap year. Commented Jul 5 at 6:57

I currently see one comment in this thread with the correct answer, though serveral people hint at it.

1. Make sure that your payroll system is working correctly, according to local law.

2. Make sure that your employee contracts match what your payroll system is actually paying. Maybe this is a yearly salary divided down, or more likely from what you say, it is an hourly rate multiplied up. Whichever it is, THAT is what the contract MUST say.

End of story. No fudging allowed.

• While I agree with what you've written (kinda), it sorta works the other way 'round. It's the contract text that comes first, and the pay office (payroll software) that must minimally meet those signed obligations. I've experienced negotiated changes to salaries made minutes before signatures were added to contracts. The pay office staff were "the last to know" what the outcome was to be... Commented Jul 4 at 11:52
• @Fe2O3 I get what you are saying, but you are probably starting from the position of having a decent payroll system. My key point is that if your payroll isn't adding up correctly, your local Tax collectors are going to make your life VERY interesting, and they won't give a damn about your employee contracts. Commented Jul 4 at 16:19
• Yeah, running a business isn't a walk in the park on a sunny day... Commented Jul 4 at 18:26
• Yes, this is the sanest approach. Then provide the 'negotiators' with a chart of hourly to annual, or show them how to multiply by 2080 or whatever. Yes, the annual total doesn't end with a bunch of zeros, complain to the Calendar Deities. Commented Jul 5 at 12:09

Please note that the following methods work on humans. They do not work on the tax authorities. Make sure your accounting, books and taxes are in good order, otherwise employees will be the least of your concerns.

So what to do when you are owing people a miniscule amount of money?

• Overpay. If you cannot correct your payroll system to the exact amount offered because of rounding problems, then instead of slightly underpaying them, slightly overpay them. Nobody will complain about a cent too much. Okay, correction: somebody will, just because people are weird, but you can safely ignore them, they have no case.

• At the start of every year, let your newest intern go round and give every employee a dollar. Explain that the payroll system will make rounding mistakes of half a cent and that the dollar more than covers that and you don't want to hear about it again. That is basically overpay, just more personal, more funny and less paperwork. Gives off more of a "we all cool here, we don't let get the algorithms in the way of fairness."

• Make them realize the value they are complaining about. Put a huuuuge jar of cents in the HR/Accounting office/floor and tell everyone that if they notice mistakes in the cent range in their payroll, they should come up and just take one from the jar. No questions asked, no red tape, no papers to sign or receipt to fill. Just take it. That jar of cents of probably cheaper than whatever your interior designer wanted to put there anyway. And while people love to complain about mistakes, nobody will even consider finding out which floor HR is on and go there, just to get a cent. Write angry emails on work time? Sure. Move their lazy body to actually get a cent? Hell no.

Again, I would like to caution you: I have seen these methods work successfully on humans to drop the complaints about total non-amounts of money to zero... but your accounting needs to be waterproof. If it is actually your accounting that is off, entertaining a few humans is not your problem.

• Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on The Workplace Meta, or in The Workplace Chat. Comments continuing discussion may be removed. Commented Jul 5 at 19:38

The obvious answer here is to ensure that your offer letter is consistent with your payroll system; it's probably easier to change your offer letters than your payroll system.

• That would require changing the work contract of all existing employees. It is probably a change both sides easily agree on but it is a massive amount of bureaucratic paperwork for existing employees. Changing it for future employees is indeed easy. Commented Jul 3 at 6:45
• @quarague If annual reviews usually result in raises, even just cost-of-living adjustments, you can use that as a natural time to correct the discrepancy. Commented Jul 3 at 13:28
• We could offer pay rates that divide down neatly in to hourly amounts. A lot of government jobs I've seen posted have weird pay brackets. Maybe they know something the rest of us don't? Commented Jul 5 at 12:04

You need to understand how the payroll system is doing it. Do you specify the hourly rate, or the weekly amount, or the monthly amount, or the yearly amount? That number is what is going to be used to calculate each paycheck.

Once you know the value that goes into the payroll system when you generate the letter use the numbers that result in a pleasant surprise for the employee.

This isn't just a new hire issue, it is also important when you give annual raises or promotions.

For example if you want to tell them they will be earning \$45,000 a year, and you are using a 2080 hour year; if the payroll system doesn't accept fractions of a cent then enter it as \$21.64 an hour. If they do the math that means they will be getting an extra \$11.20 a year. Thus a pleasant surprise. If the system does accept fractions of a cent, then the letter should reflect that.

• Yes, but probably no one anywhere gets that full amount deposited in their bank account. My paystub has about 10 pre-tax deductions of cents to dozens of dollars, a couple post-tax amounts, then 4 deductions for taxes (it could be more if the city charged tax also). By the end of all that I 'get' about 55% of my rate. So given that the rate is divided by 24 to start with, and umpteen deductions and taxes which can vary at times, anyone who could find a penny in that mess needs their head examined. Then at Income Tax time you can easily owe or be owed \$2000. Then that much property taxes... Commented Jul 4 at 23:50

Don't look now, but...

01 Jan 2018 was a Monday; the start of a typical work week.
01 Jan 2024 was a Monday, too.

31 Dec 2018 was a Monday.
31 Dec 2024 will be a Tuesday.

All other things being equal (long weekends, holidays, etc.), there's an extra day to work in 2024 (compared to 2018) to earn one year's income.

If pays are calculated based on hours worked in each and every pay period, then you must make sure the letters claiming "annual amount" state "approximately \$45000 per year".

The payroll software I was involved in developing (many years ago) allowed the pay office to specify whether the employee's pay was hourly, weekly, fortnightly, monthly or an annual amount. (And, it included quite comprehensive HR functionality, like Letters of Offer based on one set of data.)

### EDIT:

Disregarding statutory holidays, there may be 20 (Feb) to 23 (Mar) working days in one month. Therefore, the basis of one's pay must be clearly stated as "\$x per hour", "\$x per week", "\$x per month", etc. Any conversion from one time unit to another will vary considerably. Anecdotal evidence has been that competent software and/or payroll staff will, when necessary, work with "rounding adjustments" to the benefit of the payee to avoid "underpaid" complaints and the concomitant costly working hours spent resolving issues involving meager amounts.

• I don't think you can legally have a contract that only states an approximate salary. You could state an exact hourly rate and the write 'this comes to approximately \$45000 a year' but only stating an approximate amount almost certainly doesn't work. Commented Jul 3 at 6:47
• @quarague Thank you for pointing that out. I'd thought the preceding phrase, "based on hours worked in each pay period" indicated that any annual amount must be only a courtesy approximation calculated for the reader. Commented Jul 3 at 7:43
• @Fe2O3 i can confirm that what you actually wrote, indeed, states that :) the best answer here. Commented Jul 3 at 19:43
• A year not fitting into an even number of weeks can cause more fun than just the 1 day variance. If you're paid (every other) week it can result in years with an extra pay period. About 15 years ago that happened at the company I worked for; and there was a lot of angst in the office rumor mill that management was considering dividing our annual salary and leave accrual rates into 27 chunks instead of 26. If I ever knew if that was under serious consideration by the powers that be, I've since forgotten. We were given 27 pays that year (and the matching extra hours of PTO). Commented Jul 4 at 18:27
• Months should be 4 weeks. There should be 13 of them. The extra day or two at the end is a holiday and isn't counted in. Every year should start on a Monday. Done. Commented Jul 4 at 21:24

The core of your question here is that you input a yearly salary, break that down to an hourly rate, and then use that hourly rate to re-compose a yearly salary, and it's not identical. That's not a workplace question, that's a computational inevitability of rounding errors.

Furthermore, mathematics aside, expressing a yearly salary is notably different from expressing an hourly salary. Salaried employees tend to receive a fixed salary with an agreed upon expected amount of hours worked during the year, but small variations in actual hours worked are often not corrected in salary (in informal scenarios, I'm not including things like legally protected on-call bonuses etc).
Comparatively, hourly employees will be paid specifically for the hours they worked, commonly measured by marking the specific start and end times of their work. What they get paid is pretty much regardless of how many hours they were expected to work across the year, it's based solely on the actual hours worked.

yearly rate is 45,000 and appears on the offer letter as such, along with a calculated hourly rate

When you have more than one source of truth, you open the door to those sources being able to contradict one another. Someone messed up here and likely forgot to explicitly point out that one of these numbers is the official number, with the other being an indicative approximation based on that official number.

Educated guess: did someone in HR try to be clever about using one contract template for all employees, both hourly and salaried? It sounds like it.

The answer on how to avoid this is to stop trying to express things as two different units at the same time, thereby avoiding both the mathematical rounding errors and the implied differences between hourly and salaried employees.

• Right. To say nothing of systems that pay twice a month vs every 2 weeks. We struggle with our retarded calendar instead of fixing the blessed thing! My paychecks vary by a couple pennies here and there despite me being not exactly salaried, but fixed hours instead, not hourly, because I have to work X hours every week, with no variation. But I have different number of hours on different weekdays, and so Annual Leave (vacation) and Holiday days require adjusting my lunch length some weeks even though I take lunch whenever I want and there is no time clock at all... Just let it go. Commented Jul 4 at 13:57

This has caused employees, in some cases, to inquire as to where their penny is :). How do organizations typically alleviate the difference in calculation issue? Any suggestions?

The typical approach is to have a single, sound method of payroll calculation.

And if for whatever reason there is a known systematic error in the computer programming that you won't or can't economically fix, then you acknowledge that state of affairs publicly to the employees, and either make a manual correction or apply a setting to the automatic calculation that results in an excess in favour of the employee.

I think a lot of bosses misunderstand that the issue is not always the quantum of error, but their fundamental attitude to the accuracy of the payroll.

We've almost all dealt with bosses, at some point in our lives, who thought they could renegotiate the payroll as they went along, who seemed think paying wages accurately and on time was not on their priority list, or who thought they did not need to employ a competent clerk to execute the payroll.

I suspect the fundamental problem here is that you're advertising a certain "salary" and then in fact calculating basic pay on an hourly basis. It might not be so much that the calculation is wrong, but that internal decimal amounts are insufficiently precise to express an exact yearly salary as an hourly amount. In that case, calculate your basic pay as a fixed salary amount instead, and only drop into hourly calculations if necessary to partially deduct or enhance the salary amount.

Above all, taking the issue seriously as a matter of principle when small errors do arise for the first time, will likely lead to much greater trust and forebearance if larger errors might arise.

It really isn't about the penny, but about whether you have the right attitude to a very important matter, in much the same way as the new employee waltzing out the door two minutes early isn't, if challenged, well-advised to justify himself to the boss by the small amount of time stolen, but to either ask permission for an allowance, or else sit back down for two minutes in a perfunctory way.

• Ok, it should be accurate. But moaning about trivial things quickly leads to a race to the bottom ending in "work to rule", complaining about what others are getting vs oneself and a whole mess of other childish behaviors. Hourly work is often held to strict clock in and out, because otherwise it immediately degenerates. Non-hourly, it is often overlooked, especially if they sometimes work 'late', take a phone call on off days and so on. The solution is for everyone to grow up, but good luck! Commented Jul 4 at 14:16
• @HappyIdiot, the principle of a payroll that is accurate and fully under control is not a trivial thing - it is probably the most important thing in the employment relationship. The quantum of error on the particular occasion may be as trivial as a penny, but an employer making unilateral and undeclared decisions that error in the payroll is tolerable at any level, and at what level, is I'm afraid a deeply serious error of principle. (1/2) Commented Jul 4 at 16:10
• It is an error just as it would be if the bank clerk did so when dispensing your wages, or the shop clerk did so when dispensing your change. You might not often notice a penny missing from a non-round withdrawal or from change, but if you do, the most inflammatory response possible is for the person who has made the error to say "oh it'll do", rather than "my mistake, here is the balance". (2/2) Commented Jul 4 at 16:10
• So round up when paying people and round down when charging them. If your business is sensitive to pennies one way or another, it's your last month of business anyway. Commented Jul 4 at 21:27
• @HappyIdiot, the problem is that simplifications almost always lead to businesses paying even more money than just hiring the staff to manage the complexity. Like you mentioned accruing 9.375 hours a month. The boss could make it easy on himself and allow 10 hours to be accrued per month, and round up part months of employment, but it'll cost more than just having someone to twiddle the small numbers. Commented Jul 5 at 18:40

OK, this might seem like overkill with all the other answers here. If an employee is salaried for X, then you owe the employee X between January 1 and December 31. This satisfies the work contract, despite any miscalculation done with an hourly rate on the same contract. HR is often going to divide the annual salary by 2080 to give an estimated hourly rate, for sake of convenience. It's overkill to have HR generate a fake timesheet in the payroll system just to put a number on the contract before each hire.

There is no need to correct the work contracts as long as they read "salaried" and give an annual rate. You should find out how many hours per year the person generating contracts is using to derive an hourly number. Let's call that number N. One could infer that the hourly rate is a typo, UNLESS it's significantly lower than the annual salary divided by N.

At the end of the day, gross annual pay on a W-2 statement will tell you if the payroll system is accurate. (assuming you're in the USA).