Arrears Definition
An arrear, in simpler words, is an overdue payment that has not been paid by the stakeholder in the given time.
Arrears are very complicated. HR professionals spend a good amount of time calculating, processing, and managing business arrears, especially ones related to employee payroll.
Clearing arrears is important to ensure employee trust. That’s not it! There are more reasons why arrear management is important for a company. Shall we discover all of them?
Let’s explore:
Understand The Arrears Meaning
The word “arrear” is so common in the business world. It is nothing but a payment that is not paid or released at a particular time.
When you miss a payment more than once or twice, it will be accounted for under arrears. For most companies, arrears are those payments that are released or cleared at the end of a particular period.
There are different types of arrears such as DA arrears, salary arrears, and more.
Now, let’s discuss salary arrears– one of the most popular types of arrears, in the next section!
What are Salary Arrears with Example?
Salary arrear often happens during the time of annual appraisals.
When an employee does not receive a portion of his or her salary due to a specific reason, it is termed salary arrears.
There are multiple reasons why this happens, which we will discuss in detail in the upcoming sections. For now, let’s take a look at an example to understand salary arrears better:
Amit’s salary was Rs 15,000 in April and he got a hike of Rs 5000 in May. His increased salary was reflected in July. Although his salary was revised in May, he received the same in July. This means, his July payslip will include arrears for May and June, i.e. a total of Rs 10,000.
Reasons Behind Salary Arrears
Here are some of the most common reasons why salary arrears happen:
Missed Payments:
This usually happens when the finance or HR department ends up making a mistake during payroll calculation.
Attendance Errors:
This happens when employees do not mark their attendance properly or their managers do not approve them on time and the HR process payroll unknowingly. Such arrears are mostly clear in the subsequent month.
Bonus Omission:
Most companies provide their employees with bonuses such as performance or festival bonuses. When managers do not approve a bonus on time, it is adjusted in the next salary of the employee.
Late Reimbursement Claims:
When employees are eligible for reimbursements for office-related costs like travel, food, and fuel but they fail to claim them on time, it comes under arrears.
Salary Revision:
We have already given an example of this type of arrear in the earlier section. This type of arrear happens when an employee’s increased salary is adjusted in his or her next month’s salary.
Importance of Paying Salary Arrears
Most of the time, arrears in the salary are cleared in the subsequent salary of the employee. Since the payment was already late, it is important to pay the employees as soon as possible.
Errors in payroll usually happen due to manual systems and they are unavoidable. However, you can do damage control and increase employee trust by promptly addressing these arrears.
Even though they would be upset that the money wasn’t sent at the specified pay period, they would know that their company makes up for mistakes by paying the amount in arrears.
Processing Salary Arrears
Let’s be honest, no one likes receiving an arrear– it is really upsetting. So, it is your primary duty to figure out how you can quickly calculate and process the arrears at the earliest. You must take care to make sure they don’t have another bad experience.
To compute the salary arrears of employees, you need to take the following factors into account:
- Find out the exact amount of the employee’s basic pay
- Find the exact amount he or she was meant to receive
- Compare the amount with the amount s/he actually received
- The difference between these amounts will be the arrear of the employee that should be paid accordingly
That is everything about arrears you must be aware of.
Now that you know arrears can directly affect employee trust and morale, it is always better to avoid them. Whether you can avoid or not, you can save the time spent on them by embracing automation.
Our simplest HR software- HROne can help. Try now to not waste any second on managing it. Do not take our word, book a demo to see for yourself!