How to Develop a Payroll Policy for Your Small Business


Payroll isn’t just about paying your employees. It is their family expenses, rent and mortgage payments, birthday gifts, and so much more. That’s why it’s very important for every employee to know what to expect on a payday. Any payroll irregularities or misunderstandings can influence employee morale and motivation, and as a result, eventually, affect business productivity. In order to avoid these problems, you have to streamline your payroll policy. The policies have to be realistic and easy to comply with. The more complicated they get, the more difficult it becomes to follow them.

The payroll policy includes several parts. Among some of the most important ones are pay periods, timekeeping, breaks and lunches, underpayment, and overpayment. Let’s focus on each one of them in the context of creating a well-functioning payroll policy.

Pay Periods and Paydays

All of your employees should know when their wages or salaries are due, a day which is known as a payday. It’s very important to avoid any unforeseen irregularities in this regard.

A pay period is the period of time during which the number of worked hours is estimated in order to calculate an accurate payroll. A pay period is usually based on the business budget or the needs of the employees.


The purpose of timekeeping in a payroll policy is for employers to be able to track the time and attendance, and for employees to understand the value of every worked hour. The company should keep an accurate record of time worked to calculate salaries fairly. Reporting hours worked should be the responsibility of every employee.

In order to avoid any misunderstandings, employers should clearly define what hours worked typically include. Let’s take a closer look at what “hours worked” means.

According to the Department of Labor (DOL):

  • The amount that employees should receive can be determined based on knowing the number of hours worked, defined above.
  • Employers subject to the Fair Labor Standards Act must pay at least the minimum wage to the workers.


Short breaks (usually up to 20 minutes) are normally counted as time worked, and therefore rest periods of short duration are typically counted as hours worked.

A lunchtime, on the other hand, (typically defined as a break lasting 30 minutes or more) does not need to be included in the hours worked.

Underpayment and Overpayment

Typically, if employees work for more than 40 hours a week, they need to receive at least 1.5 of their regular rate of pay to compensate for the overtime hours. Extra pay for working weekends and nights is paid under an agreement between the employer and the employee. The FLSA does not require extra pay for weekend work. In the case of erroneous overpayment, it is normally regarded as an advance of future wages.

In the case of underpayment, the employee should promptly inform the General Manager or Payroll Manager about the error in the amount of pay. The corrections must be made as soon as possible.


Employees may love what they do at work and will gladly contribute to the success of the company, but a paycheck is an ultimate reason they come to work. A quality payroll policy is your fast-lane ticket to high engagement, low employee turnover, and is an effective tool for improving employee work ethic.

I hope that this article gave you a useful overview of what payroll policy is, and has granted some helpful insights for empowering your business.

Originally published at on October 4, 2020.



Synder Business & Accounting Blog

Helpful articles for SMBs, e-commerces, and finance specialists to manage your business data better and facilitate your accounting data.