The devil in the details

01 September 2019

This article was featured in the September 2019 issue of the magazine.

Ian Whyteside MCIPP FMAAT ATT, CIPP board director, discusses payment on demand

This year has brought a flurry of questions about the traditional payroll process. This time the issue is about paying employees more frequently than we may have ever considered in the past. Is ‘payment on demand’ a push for necessary change or an annoying fad?

Monthly payroll dominates our world covering the vast majority of UK employees, but anecdotal evidence suggests around six million employees are paid weekly. Generally, these are the longest and shortest frequencies in use.

Payment on demand is based on the view that employees should not have to wait to be paid for the work they have performed. Since monthly pay at or towards the end of the calendar month dominates, it means employees are often being paid four weeks in arrears and a couple of days, if anything, in advance. It is easy to sympathise with the view that such an arrangement is unreasonable and bears heavily on many employees.

Some of the comments favouring change suggest that the move to less frequent payment is actually driven by banking and corporate greed. Though this notion may have been true of certain businesses it is difficult to accept that every change in pay frequency was driven in such a way. There is no doubt that less frequent payroll processing is administratively efficient and cost effective – more so if the payroll is outsourced to a commercial provider. The recent growth in cash payments is largely driven by increases in handling charges imposed by the banks.

A second argument for more frequent and on demand payment is that employees should, and sometimes need, greater control not only over the amount they are paid but also how frequently. As an aside to this, some have suggested it is required as an aid to personal finance.

It is argued that more frequent payment is needed to allow for proper and more effective personal budgeting. Is this a genuine shift in personal spending, or a means to market a payroll system’s ability to generate payment on demand?

There has always been people who live with tight finances, but this century has brought to us a much greater demand for employers to take more notice of employee financial wellbeing. This has led to some employers introducing financial planning programmes and sometimes financial assistance where an employee requires it.

However, Julie Lock pointed out in her article Flexible paydays, (see Professional in Payroll, Pensions & Reward, April 2019), only 12% of employers offer their staff formal, face-to-face, financial advice. This is unlikely to change much – and small businesses tend not to do any of this.

Whilst recognising that statistics show levels of short-term debt are now greater than at any time, this still does not show clearly that making payroll payments more frequently is the answer. For many it will provide short-term relief, there is no doubt; but surely a question mark hangs over it being ‘the answer’.

The desire for more frequent payment to help people with their finances is the complete opposite to the 1980s. During this period employees faced a revolution in financial transactions with banks and building societies, landlords, councils and others moving to monthly payments processing. Many payroll teams, like my own, found that weekly paid staff were 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.

...some have suggested it is required as an aid to personal finance

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).

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 such third-party facility. Take, for example, the Wagestream system, which it is understood features two charges: £1 per worker for the employer and £1.75 per transaction, paid presumably by the employee, every time they draw funds.

Employers need to be careful about this because section 15 of the Employment Rights Act 1996 contains specific protections against the employer receiving any payment from an employee for the benefit of the employer. Under sections 13 and 14 of this Act, employees must not suffer any cost in the process of obtaining their wages, nor can they suffer any deduction which has not been subject to their written authority. As these advances are effectively loans, the charge must very clearly and unambiguously be in relation to the obtaining of the credit and not for obtaining their wages, otherwise it could be seen to be a charge on their wages.

It is also critically important to ensure the appropriate authority to make the deduction. Payroll professionals know that they need to obtain both a receipt for the advance and a clear and unambiguous authority to deduct the advance from the next wages payment due.

Problems can arise where third parties put the authority for deduction from wages in their own documentation. Getting the wording right is important. It is payroll that makes the deduction or adjustment, and therefore in the ‘firing line’ if any complaint of unlawful deduction is made. Accordingly, payroll must surely have the final say in the wording used by a third party.

Summary

This article is not designed to provide any definitive answers to this interesting and challenging development. It is for employers to determine whether they wish to change payroll frequency.

If there is a financial wellbeing issue within the organisation is it best served by more frequent wages payment? It may not be the right answer in every case. A financial wellbeing issue is best served by an employer, in discussion with experts, examining the cause of an employee’s financial issues and to assist in implementing a solution that will actually work.

Whether it would be right to completely change payment frequencies simply because people are demanding it, for no other reason than because they want it, is not necessarily a way forward.