Payroll Policy: What To Include + Example

The first stage in creating an effective payroll process is to create your payroll policy. This resource acts as a single source of trust for all things payroll.

Use this guide to create an effective payroll policy to guide payroll in your org. 

What Is A Payroll Policy?

A payroll policy is a set of guidelines and procedures established by an organization to help guide managing payroll and compensate employees for their work. This policy outlines how employees' wages, salaries, and other forms of compensation are calculated, processed, and distributed.

What To Include In A Payroll Policy

With the above in mind, here are the key components your payroll policy should include:

Purpose and scope 

• Statement of the policy's purpose and scope of the policy specifying which employees it applies to (e.g., full-time, part-time, contractors).

Pay schedule

• Frequency of pay periods (weekly, bi-weekly, monthly) and specific pay dates e.g. last Friday of the month.

Compensation structure

• Details on how wages and salaries are determined
• Information on hourly rates, salary ranges, and criteria for pay increases.
• Policies on bonuses, commissions, and other incentives.

Overtime and holiday pay information

• Definitions and eligibility criteria for overtime.
• Calculation method for overtime pay.
• Pay rates for working on holidays.

Deductions

• List of mandatory deductions (taxes, social security, etc.).
• Optional deductions (retirement contributions, health insurance premiums, charitable donations).
• Procedure for authorizing deductions.

Timekeeping

• Methods for tracking hours worked (time clocks, timesheets, electronic systems).
• Procedures for submitting and approving timesheets.
• Guidelines for reporting and approving overtime.

Responsibilities

• Roles and responsibilities of payroll staff and managers.
• Employee responsibilities regarding timekeeping and reporting.

Payroll processing

• Steps involved in calculating and processing payroll
• Deadlines for submitting hours worked and other payroll-related information.
• Procedures for handling payroll errors and corrections.

Direct deposit and paychecks

• Options available for receiving pay (direct deposit, physical checks, payroll cards).
• Procedure for setting up or changing direct deposit information.
• Policy on lost or stolen paychecks.

Leave and absence policies

• How different types of leave (vacation, sick leave, parental leave) affect payroll.
• Pay policies for paid and unpaid leave.
• Procedures for requesting and approving leave.

Technology

• Specify the use of any technology including an HRMS, time tracking software, or specialist payroll software.
• Record service agreements and procedures with external payroll services.

Stay up-to-date on all things HR & leadership

Get weekly insights and how-tos on leadership and HR’s biggest and most pressing topics—right to your inbox.

• Your email*
• By submitting this form, you agree to receive our newsletter, and occasional emails related to People Managing People. You can unsubscribe at any time. For more details, please review our privacy policy. We're protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
• Phone
  This field is for validation purposes and should be left unchanged.

Δ

Compliance

• Assurance of compliance with federal, state, and local labor laws.
• Adherence to minimum wage requirements, overtime regulations, and tax obligations.

Recordkeeping

• Requirements for maintaining accurate payroll records.
• Duration for keeping payroll records.
• Policy on employee access to their payroll records.

Employee communication

• How payroll policies will be communicated to employees.
• Procedures for informing employees about changes to payroll policies.
• How employees can address payroll-related concerns or discrepancies.

Confidentiality

• Policies and procedures for maintaining the confidentiality of employee payroll information.
• Access control to payroll records.

Review and updates

• Schedule for reviewing and updating the payroll policy.
• Schedule for undertaking payroll audits
• Process for implementing policy changes.

How To Write A Payroll Policy

So now you know what to include, follow this easy step-by-step process to write your payroll policy.

Step 1: Understand legal requirements

1. Research relevant laws: Familiarize yourself with federal, state, and local labor laws, including minimum wage, overtime, and tax regulations.
2. Consult with legal and HR experts: Ensure compliance by consulting with legal advisors or HR professionals who specialize in payroll and employment law.

Step 2: Define the purpose and scope

1. Purpose statement: Clearly state the objective of the payroll policy, such as ensuring fair and consistent pay practices.
2. Scope: Specify which employees the policy applies to (e.g., full-time, part-time, temporary, contractors).

Step 3: Develop the pay schedule

1. Frequency of pay: Decide how often employees will be paid (weekly, bi-weekly, monthly).
2. Pay dates: Establish specific pay dates and communicate these to employees.

Step 4: Outline compensation structure

1. Salary and wages: Define how salaries and hourly wages are determined.
2. Pay Increases: Detail criteria for salary increases and performance-based raises.
3. Bonuses and commissions: Explain the eligibility and calculation methods for bonuses and commissions.

Step 5: Address overtime and holiday pay

1. Overtime policy: Define what constitutes overtime and how it will be compensated.
2. Holiday pay: Specify pay rates for working on holidays and eligibility criteria.

Step 6: Detail deductions

1. Mandatory deductions: List all required deductions, such as taxes, social security, and garnishments.
2. Voluntary deductions: Include options for retirement plans, health insurance, and other voluntary deductions.
3. Authorization: Outline the process for employees to authorize voluntary deductions.

Step 7: Establish timekeeping procedures

1. Time tracking methods: Specify how employees should record their work hours (e.g., time clocks, timesheets, electronic systems).
2. Submission and approval: Detail the process for submitting and approving timesheets and overtime.

Step 8: Describe payroll processing

1. Payroll calculation: Outline the steps for calculating pay, including regular and overtime hours.
2. Processing deadlines: Set deadlines for submitting timekeeping records and other payroll information.
3. Error handling: Explain procedures for addressing payroll errors and corrections.

Step 9: Define payment methods

1. Direct deposit: Provide options and procedures for setting up direct deposit.
2. Physical checks: Explain the process for distributing physical checks if applicable.
3. Payroll cards: Include information about payroll card options, if offered.

Step 10: Address leave and absence policies

1. Paid leave: Define how vacation, sick leave, and other paid leave affect payroll.
2. Unpaid leave: Outline policies for unpaid leave and its impact on payroll.
3. Leave requests: Detail the process for requesting and approving leave.

Step 11: Ensure compliance

1. Regulatory compliance: Ensure all payroll practices comply with relevant labor laws and tax regulations in their respective jurisdictions.
2. Minimum wage and overtime: Reiterate compliance with minimum wage and overtime laws.

Step 12: Set recordkeeping requirements

1. Record maintenance: Specify how payroll records should be maintained and for how long.
2. Employee access: Outline how employees can access their payroll records (most payroll solutions have self-service features).

Step 13: Develop employee communication procedures

1. Policy Communication: Explain how payroll policies will be communicated to employees.
2. Updates: Describe the process for informing employees about policy changes.
3. Addressing Concerns: Provide a clear process for employees to raise payroll-related concerns or discrepancies.

Step 14: Ensure confidentiality

1. Confidential Information: Define policies for maintaining the confidentiality of payroll information.
2. Access control: Specify who has access to payroll records and under what conditions.

Step 15: Assign Responsibilities

1. Payroll staff roles: Define the roles and responsibilities of payroll staff and managers.
2. Employee responsibilities: Outline employee responsibilities regarding timekeeping and reporting.

Step 16: Review and update policy

1. Regular Review: Set a schedule for reviewing and updating the payroll policy.
2. Implementation: Detail the process for implementing and communicating any policy changes.

Step 17: Document and distribute the policy

1. Write the policy: Draft the policy document based on the outlined steps and ensure clarity and conciseness.
2. Review and approval: Have the policy reviewed and approved by relevant stakeholders.
3. Distribution: Distribute the policy to all employees and ensure it is easily accessible (e.g., in an employee handbook or on the company intranet).

Payroll Policy Example

Company Name: [Your Company Name]
Policy Title: Payroll Policy
Effective Date: [Effective Date]
Review Date: [Review Date]

1. Purpose

The purpose of this payroll policy is to outline the procedures and guidelines for compensating employees in a fair, consistent, and legally compliant manner. This policy ensures transparency and provides a clear understanding of how employees are paid.

2. Scope

This policy applies to all employees of [Your Company Name], including full-time, part-time, temporary, and contract employees.

3. Pay Schedule

• Frequency: Employees are paid on a [weekly/bi-weekly/monthly] basis.
• Pay dates: Paychecks are issued on [specific day(s) of the week/month, e.g., every other Friday].

4. Compensation Structure

• Salaries and wages: Compensation is determined based on job role, experience, and performance. Salary ranges are reviewed periodically.
• Pay increases: Performance-based raises and annual reviews determine salary increases.
• Bonuses and commissions: Eligible employees may receive bonuses and commissions based on predefined criteria and performance metrics.

5. Overtime and Holiday Pay

• Overtime: Overtime is defined as hours worked beyond 40 hours per week. Overtime is paid at 1.5 times the regular hourly rate.
• Holiday pay: Employees who work on designated holidays will receive [specify holiday pay rate, e.g., double time].

6. Deductions

• Mandatory deductions: Federal and state taxes, Social Security, Medicare, and any court-ordered garnishments will be deducted from each paycheck.
• Voluntary deductions: Employees may authorize deductions for retirement plans, health insurance premiums, and other benefits.

7. Timekeeping

• Time tracking: Employees must accurately record their work hours using [time clock/timesheets/electronic system].
• Submission and approval: Timesheets must be submitted by [specific deadline], and supervisors must approve them by [specific deadline].

8. Payroll Processing

• Calculation: Payroll is calculated based on submitted and approved timesheets, including any applicable overtime and deductions.
• Processing deadlines: All timekeeping records must be submitted by [specific deadline], and payroll will be processed by [specific deadline].
• Error handling: Payroll errors must be reported to [payroll department/HR] within [specific timeframe] for correction.

9. Payment Methods

• Direct deposit: Employees are encouraged to use direct deposit. Forms for setting up direct deposit are available from [HR/payroll department].
• Physical checks: Employees not using direct deposit will receive physical checks, distributed on paydays.
• Payroll cards: [If applicable] Employees can opt to receive their pay on payroll cards.

10. Leave and Absence Policies

• Paid leave: Vacation, sick leave, and other paid leaves are deducted from accrued balances and paid according to regular pay rates.
• Unpaid leave: Unpaid leave is recorded, and no pay is issued for the duration of the leave.
• Leave requests: Leave requests must be submitted in advance and approved by [supervisor/HR].

11. Compliance

• Regulatory compliance: All payroll practices comply with federal, state, and local labor laws.
• Minimum wage and overtime: [Your Company Name] adheres to all applicable minimum wage and overtime regulations.

12. Recordkeeping

• Maintenance: Payroll records are maintained for a minimum of [specific number of years] as required by law.
• Access: Employees can request access to their payroll records by contacting [HR/payroll department].

13. Employee Communication

• Policy communication: This policy will be communicated to all employees and included in the employee handbook.
• Updates: Employees will be informed of any changes to the payroll policy via [email/intranet/meetings].
• Addressing Concerns: Employees with payroll-related concerns should contact [HR/payroll department].

14. Confidentiality

• Confidential Information: Payroll information is confidential and will be accessed only by authorized personnel.
• Access Control: Strict access controls are in place to protect payroll data.

15. Responsibilities

• HR staff: Responsible for keeping accurate employee records including all information pertaining to payroll.
• Payroll staff: Responsible for processing payroll accurately and on time.
• Supervisors: Responsible for approving timesheets and leave requests.
• Employees: Responsible for accurately recording and submitting work hours and making any changes known/updating payroll info.

16. Review and Update

• Regular Review: This policy will be reviewed annually or as needed.
• Implementation: Any changes to the policy will be implemented and communicated promptly.

Approval:

• [Signature of Authorized Person]
• [Title]
• [Date]

This payroll policy ensures that all employees are compensated fairly and in compliance with applicable laws and regulations. For any questions or concerns regarding this policy, please contact [HR/payroll department contact information].

Join The People Managing People Community

For more advice on payroll and other HR policies, join our supportive community of HR and business leaders sharing knowledge and best practices to help you grow in your career and make greater impact in your organization.