Arrears | Meaning and Definition

What are arrears? 

Arrears are overdue payments resulting from employer incorrect calculations or delays in the payroll system. The meaning of arrear is a payment that is part of regular pay but becomes due later (e.g., overtime, leave salary, bonus). Typically, employees must submit a written application so that they receive their arrears payments from the employer.

Example of arrears

Sarah, an employee, consistently worked 10 hours of overtime per week for the past three months. However, due to a payroll system error, she did not receive the additional pay of $15 per hour for the overtime hours worked.

Realizing this, Sarah submits a written application to the HR department, explaining the issue and providing evidence of the 30 hours of overtime. The company acknowledges the mistake and processes the arrears payment, ensuring Sarah receives the overdue payment of $450 (30 hours x $15 per hour) for the miscalculated overtime in her next paycheck.

Benefits of arrears in payroll

They can provide several benefits to your business, including

• Improved cash flow, as you will have more money available to cover expenses in the short term.
• Increased efficiency, as employees will be paid on time and be less likely to experience financial stress, leading to decreased productivity.
• Greater flexibility, as you will be able to make changes to your payroll more easily. 

What are standing arrears?

Standing arrears in payroll are sums of money owed to employees but have not yet been paid. They can be caused by several factors, such as missed payroll deadlines, miscalculations, or even fraud.

For example, if an employee is entitled to receive certain allowances or bonuses regularly, but for some reason, these payments have not been made for several months, the unpaid amount for those months would be considered standing arrears. It’s a term often used to describe a backlog of payments or financial obligations that are due but have not been settled up to the current date.

Standing arrears can occur for various reasons, such as when an employer does not have enough money to pay all of its employees’ salaries on time or when an employer deliberately withholds wages in violation of the law. Some states have laws that require employers to pay interest on delayed wages.