How to develop a payroll policy for your small business

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):

  • Hours worked is the time during which an employee is required to perform the official duties. It also includes travel time during scheduled work hours from site to site, and work meetings and training.
    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 Fair Labor Standards Act (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 company’s success, 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 an effective tool for improving employee work ethic. Learn more about new trends in payroll management you should consider.

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.

Kate Fidrik

Kate Fidrik

Kate is a FinTech writer with a degree in innovation technologies and experience in the e-commerce services industry. She draws inspiration from stories about unique startups and passionately follows the latest trends in global markets. Her day starts with a latte and a news digest from the world of accounting, finance management, and online-business to always keep her articles up to date.

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