In the second part of Phase 3’s HR and payroll technology Christmas wishlist, I want to focus on the request that our clients have this request from a clients have to be paid early. Let’s break this down into 2 parts:
1 – ‘I’d like to be paid earlier in December due to Christmas falling before my usual payday’
2 – ‘I’d like the option to change my pay date in future’
I’ll tackle these one at a time.
I want to be paid earlier in December
For many, paying early at Christmas is the norm, with an estimated 82% of employers paying their staff early in December. This can be great for last minute Christmas shopping but often leaves a 6 week pay period which can stretch employees financially and is one of the many reasons that ‘blue Monday’ appears in our calendar in January.
This year more than ever, with many avoiding the highstreets for shopping and opting for online deliveries an early pay day may be a huge help. Traditionally many of our clients have paid staff on Christmas Eve to allow for the last minute dash around the shops, but this year this has been brought forward for most to the 18th December meaning for many at least 40 days between payroll runs.
For the first time I have also seen some companies paying staff earlier in January 2021 as well to minimise the impact meaning there are five weeks between December, January and February payrolls to try and reduce the impact for employees of the lengthy January payroll run.
There are, of course some common pitfalls with paying staff early, not least from a cashflow perspective for businesses with aged debt increasing over the December period from customers, but also from an employee perspective, the impact can mean a tough month in January. A recent CIPP Poll found that 52 % of employers did nothing to support employees through the longer period of January. You can see a full breakdown of the findings below, in response to the question: ‘“As January is a long month due to most businesses offering an earlier pay date in December, what do you do to assist employees?”
We maintain the regular pay day in December, so this is not an issue: 40%
We offer a December bonus: 4%
We offer advances: 2%
We offer a Christmas savings scheme: 1%
We provide financial education on budgeting: 1%
I want to choose my future pay date
One way to reduce the impact for employees is to think about the second part to this Christmas wish request – which is the option for employees to choose their pay date.
This is something that I have written about before and having been involved in many discussions over the matter in the past few weeks. For this very reason, it is a subject I wish to revisit.
How does it actually work? In order to protect the employee and the cashflow of the business the on demand payroll providers essentially ‘loan’ the money from the employees accrued wages and then charge the employee a small admin fee for the processing and the early payment. When the payroll is finalised the employee has a net deduction taken from their pay for the early pay they have already received and the admin fee, meaning the business does not suffer any costs for offering this service.
There are a number of safeguards which can be built into the automated systems including:
- Only allowing employees to drawdown on the salary they have already accrued
- Only allowing a certain percentage of the pay to be taken early to prevent a reliance on the early payment
- Only allowing the employee to make a certain number of requests within any given period before being ‘locked out’ from drawing their salary early
These safeguards exist to try and ensure employees are able to manage their income more effectively. As an example:
John has a salary of £1500 per month which usually equates to £1230 net– in January there are 31 days. On the 18th January, John is struggling and decides to make a request for an early payment. His company allow him to make a withdrawal of 50% of his accrued earnings meaning on the 18th he can request £1230 ÷ 31 x 18 x 50% = £357.10. John requests £300 which costs him a £2.50 admin fee. When the payroll is close to being finalised, the provider confirms to his employer to deduct £302.50 from his net pay and make that payment to him instead.
For many employees, this kind of scheme is very helpful, particularly those who work irregularly or are casual workers who may have to wait a month in arrears for working one shift.
One of the other features offered by providers includes the ability to have funds diverted into a savings account regularly rather than drawing down into the current account – this helps employees to save for unplanned expenses directly from their salary without the business holding their funds.
So, if being paid early is on your Chrismas wish list then reach out to us to learn which suppliers can help you tick off this item.
As expert payroll consultants, we are here to help you and your business in anyway we can.
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This article was written by James Proctor, Phase 3’s Director of Consulting & Services.