Paid in Arrears: Meaning & Best Practices

Companies have different salary arrangements for their employees. One of them is through arrears.

“In arrears” means overdue payments. This is typically used for mortgage payments and utility bills. For payroll systems, however, compensated in arrears has a distinct meaning.

To learn more about arrears, read on as we discuss its meaning in terms of payroll, pros and cons, best practices, and some frequently asked questions.

What is paid in arrears?

Being paid in arrears indicates that employees are compensated for their completed work from the previous pay period instead of the current pay period. Usually, employers pay workers 3 to 5 days after the end of every pay period.

The salary is not considered a late payment as long as it is given on the designated pay date. For example, an employee’s salary for a week period that ends on a Friday will be received the next Friday.

Salary arrangements like arrears have to be established with data and market insights to ensure competitive pay for employees. Compensation Software helps in addressing the entire compensation process and analyzing pay practices for accurate payments.

Why do companies compensate in arrears?

Many companies pay employees in arrears since it is backed by real data rather than estimations. It also allows more time for the payroll team to deliberately calculate different variables, such as paid time offs, overtime pay, tax deductions, commissions, etc.

Arrears can also mean healthy cash flow since the payment arrangement allows time and flexibility. Companies can manage cash flow by accruing the cash for later payments, earning interest before it is paid out.

Differences between arrears vs current

Companies differ in their payroll systems. Another method aside from being paid in arrears is paid in current. Hourly workers usually get arrears while salaried employees get current.

To differentiate arrears and current, here is a rundown:

	Paid in arrears	Paid in current
Payroll indication	Employees are paid after they have completed their work.	Employees are paid while the pay period is ongoing or right when it ends.
Basis of calculation	Depends on the actual record of work accomplished by an employee.	Depends on the estimation of time and attendance of employees.
Gap on payday	There is a gap between the end of the pay cycle and payday.	No gap between the end of the pay cycle and payday.
Example	Mark works Monday to Friday. When the workweek ends on Sunday, the payroll team calculates Mark’s work for the entire week and releases the salary on the following Friday, 5 days after the end of the previous workweek.	Helly gets paid every Friday of the current week. When the workweek is from Monday to Sunday, the payroll team must estimate the number of hours Helly works from Friday to Sunday.

If you are deciding on what type of payroll method best works for your company, Salary Structure can guide you in creating a strong compensation framework. It features Labor Cost Forecasts and flexible modeling tools that ensure equitable pay in your organization.

Pros and cons of paying employees in arrears

Before deciding on paying your employees in arrears, there are considerations that you need to know first. Here are the advantages and disadvantages of arrears:

Advantages

• Accurate payroll: It is best to give out salaries that are accurately calculated and are based on the actual hours worked of an employee.

• More time allowance: The payroll team has more time to correctly calculate not just the salary but also the compensable variables like paid time offs, overtime pay, and taxes.

• Seamless budgeting: You will have fixed salary dates so the budget planning will flow accordingly. The compensation is roughly the same amount every payday, so it is easier.

Disadvantages

• Financial limitations: Employees may have trouble budgeting their finances due to the long wait for salary with arrears payment.

• Delay for new hire: When paying new hires in arrears, they may have to deal with the delay in the paycheck since it will require an additional pay period before receiving the first salary.

To make arrears amenable for employees or new hires, use features from Compensation Software. It has a Job Range Wizard feature that benchmarks pay ranges between your company and the market, and HR Technology Integration with streamlined implementation for a seamless pay system.

Best practices of paying in arrears payroll

To ensure the company’s smooth flow of payroll processing and employees’ salary satisfaction, adopt these best practices for arrears method:

• Establish a payroll calendar

  A payroll calendar will give employees an overview of the payment dates and the pay periods so they are well-informed and can anticipate financial decisions.

• Discuss pay system with talents

  Make sure to articulate the arrears compensation method of your payroll so new hires can decide if they are amenable to the offer or not.

• Clarify salary for departing employees

  Ensure that employees who leave the company receive the final payment before the end of their term. Depending on your organization, include these details in your handbook to provide smooth transactions for both parties.

There is no better payroll practice than giving the employees competitive compensation whether it be arrears or not. With Compensation Software, you have access to HR-reported pay data and exclusive pricing factors to assess the right compensation specific to employee demands.

FAQs

Here are some frequently asked questions about being paid in arrears:

What does pay in arrears mean in accounting?

It means that compensation for a service or goods is given after the agreement terms are met. It could also mean that a business or company is behind on payments.

What are the tips in paying in arrears?

Some of the tips are to establish a payroll calendar, discuss the pay system with talents, and clarify the salary process for departing employees.

What is the difference between payment in arrears and late payments?

Payment in arrears has an established pay schedule, and workers know when they will get their salaries. Late payments mean that a payment is made after the supposed due date.

What is an example of arrears payment?

Employee A works Mondays to Fridays. When the workweek ends on Sundays, the payroll team calculates Employee A’s work for the entire week and releases the salary on the following Friday, 5 days after the end of the previous workweek.

What is the difference between payment in advance vs arrears?

Advance payments indicate that the service is paid for before it is provided. Examples of this are rent and prepaid phone bills. Meanwhile, arrears payments mean that the service is paid for after it is provided. Examples are utility bills and employee salaries.