When employees get paid is important to everyone at your business. It’s important to employees because it determines when they should expect their wages and how they should budget their funds.
It’s important to employers for the same reason—it influences cash flow and budgets for the business. That is why it’s essential to understand the basics of common payroll schedules and related terminology, like payroll in arrears.
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What does it mean to be paid in arrears?
Paid in arrears is a payment term in which the employee is compensated after they work for a period of time and agree to be paid after the period of time ends. Most businesses use arrears payments in order to make running payroll easier. The opposite of paying in arrears would be upfront or an advance payment before work is complete.
Arrears literally means, “an unpaid and overdue debt,” meaning past its due date. But when people talk about payroll in arrears, they are referring to the fact that employees may have a pay date that is after their pay period has ended.
So while the employer does owe the employee money for their time worked, payroll in arrears is legal (with some reasonable restrictions), and in fact, often the expectation for hourly employees.
States determine acceptable payroll schedules for employees. Typically this is done by employee type. So salaried employees will have one set of rules, and hourly employees will have another set of rules
Different payment schedules
For example, in California some salaried employees can be paid on a monthly schedule, while hourly employees must be paid at least twice a month. Additionally, employees on a weekly or biweekly pay schedule must be paid within seven calendar days of the end of the pay period.
They also have more specifications for certain industries, like the motion picture industry. These state rules exist to protect employees and ensure they are paid in a timely fashion after completing work for a business.
Before you select a pay schedule for your business, it is important to check any applicable laws in your state.
Paid in arrears example
Let’s say an employee works for a company that pays its employees on a monthly basis and in arrears. If they start working for the company on April 1st, they would work the entire month of April, but they wouldn’t receive their first paycheck until May 1st.
This is because the payment for April is made in arrears, after the work has been completed. From then on, they would continue to be paid on the 1st of every month for the work they completed in the previous month.
Benefits of paying in arrears
Paying in arrears can provide quite a few benefits for employers.
Better cash flow management
Paying in arrears helps you manage cash flow more effectively by delaying payment until work is completed and payment has been received from your clients.
Encourages hard work
Payment in arrears encourages employees to work hard and complete their tasks on time, since they know their pay depends on it.
Better payroll management
Arrears payment provides you with greater control over payroll, since you can review completed work before releasing payment.
Payment in arrears ensures that employees are paid accurately and fairly, since you can verify completed work before payment is made.
Reduces overpayment risk
It can reduce the risk of overpayment or payment for incomplete or subpar work, as payment is withheld until the work is completed to the required standard.
Disadvantages of payment in arrears
Can create financial strain for employees
Payment in arrears can cause financial difficulties for employees who rely on regular, immediate payment to cover expenses like rent or bills. Waiting for payment can cause anxiety or stress for some employees who are living paycheck to paycheck.
Decreased motivation and engagement
If employees feel that they aren’t being compensated fairly or in a timely manner, it can lead to decreased motivation and engagement. For instance, if employees feel that they are being paid less than their peers or are not receiving payment on time, they may become less motivated to work hard or complete tasks on time.
Potential administrative challenges
Payment in arrears can create administrative challenges for employers, particularly if they have a large workforce. Employers must accurately track hours worked and tasks completed to ensure that employees are paid accurately and fairly.
This can be time-consuming and complex, particularly if there are changes to pay rates, taxes, or other factors that affect payment.
Common types of payroll schedules
There are three common payroll schedules: weekly, biweekly, and semi-monthly. It’s also possible to pay some workers monthly in some areas, but this isn’t as common as the other three types of schedule.
Weekly payroll means a pay date happens once a week, for a total of 52 pay dates in the year. The pay period for a weekly schedule is a week-long, often Saturday to Friday, you can choose the best period that works for you.
Biweekly payroll means a pay day happens every other week, for a total of 26 pay dates in the year. The pay period for a biweekly schedule is two weeks long, and you can choose the days that work best for your business.
Semi-monthly payroll means a pay date happens twice a month, for a total of 24 pay dates in the year. The pay period for a semi-monthly schedule is typically the 1st to the 15th of the month and the 16th to the last day of the month. Pay days are usually on the 15th and last day of the month.
Since some months are longer than others, the exact number of days in the pay period can change with a semi-monthly pay schedule.
Why do companies pay in arrears?
Companies may choose to pay in arrears for a few reasons. Firstly, paying in arrears can help manage cash flow more effectively. By delaying payment until work is completed and payment has been received from clients, companies can avoid overextending themselves financially.
Paying in arrears can also provide an incentive for employees to complete their work on time and to a high standard. If employees know that their pay depends on completing their work on time and to a certain standard, they may be more motivated to do so.
Paying in arrears can also help make sure employees are paid accurately and fairly. You have the opportunity to review completed work before releasing payment, which can reduce the risk of overpayment or payment for incomplete or subpar work.
Payroll in arrears FAQs:
What is the benefit of paying in arrears?
The benefit of paying arrears is that a business will pay employees what they are owed for already completed work. Many small business owners choose this method of payroll because it gives them time to run payroll and time to factor in calculations like tips, PTO, or overtime.
Do most companies pay in arrears?
Yes, most companies pay in arrears, especially those with hourly or tipped employees. Since employees’ hours can change workweek to workweek, it will take payroll a few days to be finalized.
How does paying in arrears affect employees?
The biggest effect this type of payment system has on employees is the lapse between work and pay. A current pay system means employees are paid immediately, while arrears has a lag of at least a few days. This might seem like a late payment but many businesses use this payroll method and it is actually very common. Employees are paid their agreed-upon wage and it gives businesses time to run payroll.