Cash flow is an ever-present issue in the construction industry. Contractors and subcontractors are often paid once the work is completed but cash is needed during for materials, supplies and workers. Paying in arrears is one way to strike a balance.
Defining Pay in Arrears
Arrears is a financial term that relates to the status of payments in relation to their due dates. Typically, is it used to describe a regular or contractually-required payment that’s late or overdue. For example, if your utility bill is due on the first of the month and it is not paid until the 15th, the account is in arrears.
Arrears also applies to payments that are made after a service is provided. A company might pay contractors in arrears of 30 to 45 days after a project is completed. Or a contractor might bill in arrears if there is an agreement or contract in place determining the project is payable upon completion.
Many employers also pay their workers in arrears. For example, an employee might be paid on Friday for hours worked the week before.
Why Businesses Pay in Arrears
Cash flow is a major reason why a business might pay in arrears. Cash flow pays for daily operations, taxes, inventory and payroll. When an organization agrees to pay upon delivery or net 30 or even 60 days, it has extra time to boost its revenue by calling in payments on its own invoices, making additional sales or even securing financing if necessary. The breathing room provided by paying in arrears keeps the organization from draining its cash flow while still getting the supplies or resources it needs.
Paying Employees in Arrears vs. Current Pay Period
Companies set pay periods on a recurring schedule that occurs weekly, biweekly, semimonthly or monthly. The employee records the hours worked and then he or she is paid for that time. Companies may choose to pay employees for either time that has already been worked (arrears) or time the employee is currently working. For example, paying employees in arrears would occur after the employee has logged all of his or her time, after which checks would typically arrive the following week. Paying during the current pay period means the employees get paid during their actual pay period. In essence, an employee might get paid on Friday morning for hours they haven’t completed until they clock out that evening.
The Pros of Paying Employees in Arrears
One benefit of paying employees in arrears is the payroll department has more time to process checks. Payroll essentially has a buffer week to accurately calculate hours. Any discrepancies in time can be worked out before payroll is processed, eliminating the need to go back and adjust payments. Paying in arrears gives employers time to calculate overtime, tips, commissions and PTO.
Small businesses with limited capital benefit from paying employees in arrears. Organizations with hourly employees always know exactly how much their payroll will be, decreasing surprises. Processing payroll during the current pay period can’t predict overtime or sick days, so your payroll is always fluctuating.
The Cons of Paying Employees in Arrears
Paying in arrears means your new employees have to wait to get their first check. If your payroll is set up bi-weekly or semi-monthly, new employees might not get a check for two to three weeks. That can be frustrating for new employees especially if they’ve had a gap in employment. Employees are typically happier when they’re paid faster.
Paying in arrears also means employees who resign or are terminated will stay on the payroll even after their position ends.
Paying your employees requires accurate timesheets, detailed recordkeeping and a simplified process, no matter if you pay in arrears or during the current time period.
- Accurate timesheets. Payroll starts with knowing just how many hours your employees worked. Timesheets record when your employees clock in and out, tracking normal hours and overtime. Without accurate time tracking, your payroll will never be correct. Paper timesheets pose a challenge due to indecipherable handwriting and fudged numbers, plus the payroll clerk has to manually input and/or add up the time. These roadblocks can lead to miscalculations, FLSA fines for unpaid overtime and overall unhappy employees. Using a time tracking app like ExakTime’s automatically gives companies accurate data every time. Employees securely punch in and out on their mobile devices and sign off on all hours worked, ensuring compliance. Paying in arrears is simple because the data is automatically uploaded daily and weekly. Employees are paid for each and every minute they work.
- Detailed records. Knowing who you owe, and who owes you, helps balance your cash flow. The information stored in payroll needs to be secure and accessible 24/7. With a couple of taps, accounting should be able to see who has been paid and what invoices are still pending. Syncing payroll to your accounting software keeps everything in one place. And, if you’re a government contractor and required to use certified payroll, detailed recordkeeping is not only a good idea, it’s the law.
Staying compliant with the Davis-Bacon Act and other DOL acts requires federal contractors to submit Federal Form WH-347 for certified weekly payrolls, clearly documenting each employees’ name, address, correct job classification, rate of pay, daily and weekly hours worked, and the amount paid, and signing a statement of compliance.
- Simplified process. Payroll is always working against the clock to get paychecks out on time; employees aren’t happy when they’re paid late. If the process isn’t automated, like having to manually input employee timesheets, everything gets slowed down. Integrating the payroll process with online tools or third-party networks will give your data reporting, collecting and accounting a major accuracy boost while saving time. Cloud-based software systems give teams the ability to stay organized, no matter when your pay period falls.
- Visibility. A transparent payroll process helps keep everyone in the loop. Employees know exactly how much their next check will be, management can track where overtime costs are stacking up and leadership can see when cash is flowing in and when it’s flowing out.
ExakTime’s web based employee time clock software allows companies to accurately track when and where employees work, instantly uploaded the data and syncing it with payroll. All information is stored and secure, meaning switching to certified payroll is a snap. Whether you’re paying in arrears or paying employees during the current pay period, you’ll always have the most up-to-date employee data possible.