This time the experts, Esther Smith and Martin Brewer give their advice on how to change from advance pay to arrears pay.

The question: Changing from advance to arrears pay

Employees are currently paid one month in advance on the 1st of the month. Obviously this can cause all sorts of recoupment problems if employees leave unexpectedly, or run out of sick pay etc during the month for which they have already been paid.

I’d like to change the system without hitting anyone in the pocket, so it would either need to be phased in or done in the form of a loan to be recouped over time. I’m told though, that the tax implications of either option are difficult?

Legal advice:
 

Martin Brewer, partner, Mills & Reeve
 

Changing from advance to arrears pay is of course a change to the employees’ contractual terms and if you do it without consent then technically it’s a breach of contract. Thus you need to find a way to do this without unduly upsetting the employees and in a way which ensures they don’t have their finances messed up. So the first step is to explain to staff what you propose and why, and to allow sufficient time for staff to change any dates for direct debits, standing orders etc.
 
It seems to me that one way you might achieve this change relatively smoothly (although whether you can do this may depend on the size of your pay bill) is to pay staff twice for the same month, once at the beginning and once at the end, and then recover one of the payments as an overpayment of wages over say the next few months. So for example, you pay an employee pay as usual, at the beginning of say January, they work during January and you pay them again at the end of January, also for January. They will have/have had money in their bank for January and February and you will pay them at the end of February in arrears having deducted a proportion of one of the January payments on the basis that it was an overpayment of wages. You continue to do this until the extra months’ pay has been fully recovered.
 
To achieve this you must tell the employees what you are doing. Although legally you don’t need their consent to recover an overpayment of wages you don’t want to be in a position of having staff say they didn’t realise they had been overpaid, that they spent the money and that it would cause them hardship if you sought to recover it, after all it was your mistake etc. It’s much better to be up front about the proposal. Finally you will have to ensure that future deductions to recover the overpayment also do not cause the employees any financial difficulty. So make a proposal (perhaps a percentage each month) but be prepared to make individual changes for staff with particular problems.

Martin Brewer can be contacted at [email protected]. For further information, please visit Mills & Reeve.

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Esther Smith, partner, Thomas Eggar
 

Changing to payment in advance to in arrears is certainly possible but needs consultation with the employees about what you are doing and why. If you don’t get agreement with them you can impose the change, although there is a risk that employees may resign and claim constructive dismissal on the basis that this change is a fundamental breach of contract.

In reality I think this is unlikely, particularly if you work with the employees to help them adapt to this change. They will have outgoings (rent, mortgage, etc) based on the time they get paid so to change it without notice or interim measures will be really difficult for people. It may be sensible to change it gradually, over a period of some months, gradually taking it from advance to arrears, or by arranging loans or advances for the first few months to enable them to make financial arrangements and change their payment dates. Even some practical advice on talking to their banks to sort out payment dates for standing orders would help.

Esther Smith is a partner in Thomas Eggar’s Employment Law Unit. For further information, please visit Thomas Eggar.