REWARD INSIGHT
being put in an impossible position by the changes, many of whom were unable to retain their wages long enough to be able to pay their monthly rent or fund mortgage repayments. Moving their wages to monthly and hence matching the frequency of their major outgoings saved many employees from serious financial difficulty and was generally welcomed. Three options present themselves for scrutiny: firstly, the ready availability of advances; secondly, the provision of advances via a third party; and, finally, a complete transition to employee- controlled payroll frequencies. ● Employer advances – These are already available to employees and tend to be used for new staff to cover exceptionally long periods between their last payment by the previous employer and the first available payment from the new one. Payroll will also use advances to deal with underpayments created by some form of employer error or omission. Some employers already make such advances available to staff, even to the extent that it is ‘self-advanced’ rather than having to be applied for. In this option, the monthly pay run remains unchanged and the payroll team simply recovers the aggregate value of the advances since the last pay day. Our tax and rigid National Insurance contributions (NICs) regime continues to follow the standard pay frequency, which all works as long as the employer’s cash-flow can meet such unpredictable payment patterns. ● Third-party advances – This option uses a third-party provider for the cash, and could even be the payroll provider. There is also cash-card technology which, though it has been around for some time and showing its age, persists. Once again, payroll sticks to the monthly processing run, calculates the income tax and NICs and recovers the aggregate value of the advances made, preferably using a digital feed straight into the payroll. ● Employee-controlled pay frequencies – This is the revolutionary option, ditching the pay frequency completely and allowing employees to determine how often they are paid by giving them full control over the processing. The technology exists for employees to choose the frequency that suits their needs which could be as much as every
day. And why not? They worked the day, so why shouldn’t they have their net wages in their bank by the time they get home? The payroll would have to treat each payment as a formal payment, which would mean a detailed apportionment of the income tax personal allowances and determining the length of the earnings period for NICs . The employer would have to account for each individual run with a full payment submission (FPS). ...why shouldn’t they have their net wages in their bank by the time they get home? Issues Having established that technology is not a barrier to payment on demand we still need to give some thought to it. Even though we can do something, it doesn’t mean we should; and just because employees want it, doesn’t mean they must have it. Some writers have criticised the way employers have moved employees to monthly pay simply in order to save themselves a few quid, placing some employees in financial difficulty in the process. I have no problem with organisations reducing overheads – indeed, responsible business owners ought to be doing this continuously. Global competition means margins are tighter than ever and the consequences of simply bowing to employee demands and incurring additional costs could have more serious, long-term results. Can employers move to more frequent payment, give control of payroll to employees, incur additional costs and possibly not make any difference to financial circumstances? The reality, however, is that moving to more frequent payment doesn’t have to cost more if the technology is doing the work. Using payment processes completely outside of BACS and other expensive payment media means that one-off interim, or more frequent payments, isn’t necessarily going to cost more. Perhaps it is time for employers to reconsider their rigid schedules and
provide a more flexible arrangement, if this does not exacerbate someone’s financial problems. There is no doubt that although more frequent payment will help some, it is likely to be problematic for those whose personal finances are largely monthly based. There are other things to consider, too. Accurate apportionment of tax and NICs earnings periods is needed. If the employee’s tax code basis is cumulative, income tax under pay as you earn (PAYE) will generally sort itself out; but class 1 NICs with its completely outdated and rigid method of processing will have inconsistencies, mainly around rounding, to consider. Using an interim arrangement, such as making advances more readily available, will overcome issues but is not without risk. Employer-provided advances are not considered to be wages for the purposes of PAYE real time information, as long as the intention, and the reality, is to make a sum available and then recover it during a normal pay run. HM Revenue & Customs (HMRC) allow this, informally, to be treated as a short-term interest free loan repaid on pay day. As a consequence, as long as they observe the rules, employers do not need to send a FPS each time a payment is made. One of the rules, however, is the frequency and regularity of such advances because in some circumstances this could create a new pay day and hence necessitate the sending of additional returns. Whilst some employees will avail themselves of an advance-on-demand facility on an intermittent basis, others will create a new pay day frequency by choosing to extract their pay on a weekly or fortnightly basis instead of monthly. I suspect only a few will go for a truly random extraction schedule. Will the employer be able to detect a frequency pattern which then requires FPS returns, or might they get a shock when HMRC detects it instead? The use of third-party funds might be thought as the answer as it removes the need for the employer to worry about FPS returns, but would it? There is still a risk that regularity of cash advances creates a new pay day and pay frequency, if for example the employee takes an advance, say, every Friday. Another consideration is the cost of
| Professional in Payroll, Pensions and Reward | September 2019 | Issue 53 20
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