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Salary Arrears: Definition, Processing and Payments – CloveHRMS

Salary arrears are payments that a company owes its employees for work that they have already done. They are payments that the company has yet to pay to an employee. Such payments can be due for several reasons. For example, there can be mistakes in payroll, or some other adjustment must have been made. However, it can also be due to some other delays. 

Salary arrears are different from regular salary because a regular salary is what one gets paid on a regular payday. Basically, it is the payment for the current work period. However, salary arrears are payments that should have been made earlier but were delayed. So, they are catching up on the missed payments.

Legal Implications and Employee Rights

There are some legal implications related to salary arrears that you should know. Firstly, employees like yourself have the right to get paid on time for your work. Hence, the company needs to correct its mistakes quickly when there are salary arrears. Many countries have labor laws that protect employees’ rights to timely payment. 

Causes of Salary Arrears

Here are some scenarios that will help you understand why salary arrears happen. By understanding the reason, you will also know why it is important for companies to handle their payroll correctly and quickly.

1) Payroll Errors and Miscalculations

The most common reason for Salary arrears is payroll errors. Now, you may be wondering what exactly payroll errors are. Payroll errors happen when your company makes mistakes while calculating your paycheck. One of the most common mistakes that you can find is a wrong record of work hours. Some other mistakes can be made in income tax deductions or even missed overtime. When such things happen, it can cause stress and financial problems. Moreover, it can also lead to unhappy workers and legal issues for your organization.

2) Dalays in Administrative Processing

You may find out that another reason for salary arrears is delays in paperwork and processing. It is often because of bureaucratic delays and inefficiencies. For example, your company’s slow approval processes or outdated systems can cause delays. Besides, if you work in a larger organization, it might be even more common. This is because, in larger companies, information has to go through many more steps.

3) Contractual and Performance-Related Adjustments

Salary arrears can also occur due to changes in your contract or performance. For example, the extra pay might not be processed on time if you get a promotion, raise, or bonus. Similarly, if you have any retroactive payments from past negotiations, it can also lead to salary arrears. What is retroactive payment? It simply means you are paid for past work that was not compensated properly. Such adjustments are made to correct underpayment. However, you should know that they often take time to process. As a result, it leads to salary arrears.

4) Back Pay for Promotions

When you get a promotion, your salary normally increases. However, this pay raise may not get processed immediately. So, the time between your promotion and when the new salary gets paid can lead to salary arrears. To deal with this, your company has to catch up by paying the difference later. This amount that will be paid is called back pay and can cover the amount from your promotion to when your higher salary gets paid.

Processing Salary Arrears

If your company follows the given steps, it can process your salary arrears very efficiently. As a result, it will ensure that you are paid on time while maintaining good employee relations.

1) Identifying and Verifying Arrears

One of the first steps while processing salary arrears is to identify and verify your arrears. Your company should recognize arrears in payroll. Also, they will compare what was paid to you with what you should have been paid. Moreover, it involves checking your payroll records and timesheets. In this process, the most important step is verification. Your company may need your documents, such as pay stubs, employment contracts, and more. They can also ask you for your timesheets to confirm the correct amount. 

2) Calculation of the Amount Due

Once your company has identified your salary arrears, they will calculate how much they owe you. The calculation method can depend on whether you are paid hourly or salaried. In addition, your company can also include any overtime, bonuses, or other compensations. 

3) Communication with Employees

Another step while processing your salary arrears is clear communication. Your company needs to inform you immediately about the arrears and their reasons. Besides, they also need to tell you how and when you will be paid for it. Clear and timely communication will also help avoid misunderstandings and further disputes. 

Payments of Salary Arrears

Payment of salary arrears is very important. Here’s what a company should remember while paying your salary arrears. 

1) Payment Timelines and Methods

It is a legal requirement for a company to ensure that its employees receive their payments on time. Hence, your company needs to follow certain laws to avoid any penalty. There are different methods that your company can use to pay your salary arrears. For example, your payment can be made in a lump sum, where your entire amount will be paid immediately. On the other hand, they can opt to pay you in installments, where your amount is spread out over a few paydays. 

2) Handling Taxes and Deductions

One important thing to remember while handling salary arrears is to handle taxes and deductions properly. You should know that salary arrears are also subject to tax, just like regular pay. Hence, your company needs to calculate and withhold the right amount of tax from the arrears payments. In addition, there may be some more deductions that can be made from your arrears. It includes social security and other benefits. 

3) Record-keeping and Documentation

A company should keep accurate records when dealing with salary arrears. Hence, your company should have detailed records of all the payments made. Their record should include the amount, date, and reason for the arrears. It is a legal requirement to keep such records for a given period. If your company has a good record of your payment history, it will ensure any future errors. 

Challenges and Solutions

Processing and paying salary arrears can be a challenge for some companies. It can be because your employer is facing cash flow issues. Moreover, you can dispute the amount owed, which can cause conflict between you and your employer. Hence, a company should have an efficient payroll system to overcome these challenges. It will help to minimize any errors in your payroll. Also, ensure your company has clear policies and procedures for handling arrears. It will ensure consistency and fairness and make the process smoother for everyone. 

Key Takeaways

  • Salary arrears are payments owed to employees for work already completed.
  • It can be caused due to payroll errors, delays in administrative processing, and adjustments due to promotions, raises, or retroactive payments.
  • Key steps include identifying and verifying the owed amount, calculating the correct payment, and communicating clearly with employees about the arrears and payment timeline.
  • Companies must ensure timely payment of arrears, handle taxes and deductions correctly, and keep detailed records of all arrears transactions to ensure compliance and prevent future errors.

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