Understanding Payment in Arrears: Definition, Mechanics, and Expert Advice

Companies commonly handle wages by paying employees after they have worked, a pay practice known as "paying in arrears." Understanding this method allows employers to make efficient payroll systems and effectively manage money matters with clients.

What Does "Paid in Arrears" Mean?

"Paid in arrears" means paying workers for the time they have already worked, not for the current period. For example, employees get paid on March 5th for all the work done in February. They receive their payment after finishing their work for that month, called "paid monthly in arrears."

Many businesses use this system. Paying in arrears allows them time to compute tips, extra pay for overtime, or commissions. Another method is to pay "in current," where employees receive payment based on their expected working hours. The business pays based on what it thinks employees will work instead of looking at how many hours they actually did the work.

Why Companies Choose to Pay in Arrears

There are a few reasons why companies choose to pay their workers in arrears.

1. Helps companies manage their money better. They wait until the work is done instead of paying right away. Through this, they avoid overspending and ensure they only pay for the services rendered.

2. Motivates employees to do their best work and finish on time. Knowing they will not get paid until they finish their work well and on time encourages them to work hard.

3. Ensures that employees receive accurate pay. Companies can check the work before paying, so they do not overspend or pay for work that is not good enough. This is a way to make sure everyone gets fair pay.

Different Types of Payroll Schedules

There are three common ways businesses handle payroll: weekly, biweekly, and semi-monthly. On some companies, they pay monthly, but that is not as common as the first three mentioned.

• Weekly Payroll

With weekly payroll, employees get paid once a week, adding up to 52 paychecks each year. The work period for a weekly schedule usually covers one week, from Saturday to Friday. This schedule helps employees because they get paid regularly, which makes it easier for them to plan their finances. For employers, it is simpler to calculate paychecks because it happens every week.

Downsides also come with weekly payment. Processing payroll weekly takes more time and can cost more. Figuring out deductions, like health insurance, happen more often as well.

• Biweekly Payroll

Biweekly payroll means employees get paid every two weeks, totaling 26 paychecks each year. The pay period is typically two weeks long, and businesses can choose which days’ work best. Employees like biweekly pay because it is predictable and helps them budget. For employers, it is less work compared to weekly payroll and makes calculating overtime easier.

The downside is that employees must wait longer between paychecks, which can be tough. For employers, there is more paperwork and a higher chance of making mistakes.

• Semi-monthly Payroll

Semi-monthly payroll means employees get paid twice a month, totaling 24 paychecks per year. The pay periods usually cover the 1st to the 15th and the 16th to the last day of the month, with paydays typically on the 15th and last day of the month. Since months have different lengths, the number of days in each pay period can vary.

Semi-monthly pay helps employees manage their money better because they get paid more often. More than that, it helps businesses with cash flow and makes accounting easier.

But the downside to this is that paydays can fall on different days of the week, which may not be convenient for everyone. Employers will need to deal with the varying number of days in each pay period, which can be tricky.

Advantages and Disadvantages of Paying Employees in Arrears

Most companies in the United States pay their employees in arrears, and there are good reasons for that. Here, take a closer look at the advantages and disadvantages of paying employees in arrears:

Advantages of Payment in Arrears:

• No need to guess: No need to predict how many hours employees will work, which reduces the risk of mistakes.
• Time to calculate: More time to figure out taxes, paid time off (PTO), and benefits before running payroll.
• Pay for completed work: Only pay for work that has already been done, to ensure payment for only completed work.

Disadvantage of Payment in Arrears:

• Waiting time: Employees have to wait a few days after the end of a pay period to receive their pay.

Best Practices for Paying Employees in Arrears

Effective communication is essential when paying employees in arrears. Here are some tips to ensure that employees know when they will get paid for their work:

• Share a Payroll Calendar: Make sure to have a calendar that shows when employees will get paid and which days make up the pay period. Include details about the company's work week so employees can accurately figure out their overtime.
• Inform New Hires: Inform new hires of when they will receive their first paycheck whenever there is a delay of a week or more between the end of a pay period and payday. This helps them plan their finances better when they start working with your company.
• Clarify Final Paycheck Timing: Ensure that employees know when they will get their final paycheck when they leave the company. Some states require immediate payment, while others allow it to be included in the next regular payroll. Having this information in a company handbook can prevent misunderstandings during a potentially stressful time for the departing employee.

Employees who know when to expect their pay and understand how their paychecks get calculated are less likely to have concerns about receiving pay in arrears.

Paying employees a few days after the pay period ends gives employers more time to accurately calculate hours worked. Employees may need time to adjust to getting paid later, especially when they are used to a different schedule. It is important to weigh the pros and cons of paying in arrears to decide whether it is the best choice for your business. Regardless of the payment method, choose what works best for everyone involved.