For a small employer or a small payroll department, it can be an awkward situation if employees ask for an advance on their wages. In effect, such request is for an informal, short-term employer loan. However, there are also other reasons why employers may sometimes give payroll advances. Mid-month advances often occur for employees otherwise paid monthly. When exception pay items aren’t processed in time for the cut-off, advances may also be given, for recovery when the exception pay is actually processed in payroll.
A common characteristic of payroll advances is that employers don’t withhold and remit source deductions on them. For example, assume $100 in overtime has been missed from an employee’s pay. It’s true that employers will sometimes estimate the equivalent net, say $70, and advance this, rather than the full $100. However, especially if the $70 is given as a manual cheque, the difference isn’t actually remitted to the CRA. Instead, source deductions are only taken and remitted when the missed $100 is added to next period’s gross pay.
While it might seem reasonable, the example above doesn’t comply with CRA source deduction and remitting requirements. For these purposes, income is subject to source deductions on a ‘cash basis’, in other words, when paid. This means CRA source deductions are due on the full $100 in the example above, when the $70 was advanced, not when the $100 was processed in the following period.
Assume the employer is a Threshold 2 remitter, employees are paid current and February 28 was the pay day from which the overtime was missed. The $70 advance was given on March 3, and recovered in the next bi-weekly pay period, paid on March 14. In these circumstances, remittances related to the advance were due March 12 (3 business days after the remittance period March 1 – 7), but paid on March 19 (3 business days after the remittance period March 8 – 14). As such, there has been both a failure to withhold and a failure to remit, on the due dates required by the employer’s Threshold 2 status.
In this situation, there may also be a problem with EI reporting. The normal rule is that, depending on the nature of the earning, hours and dollars are insurable in the pay period worked (regular wages or statutory holiday pay) or when paid (most other forms of exception pay). If, in the example above, the missed wages were statutory holiday pay, the $100 and related insurable hours would be ROE reportable against the February 28 pay period (when the stat holiday fell, the 3rd Monday in February), not that for the March 14 pay date (when the earnings were processed in payroll). While some payroll systems handle this requirement without effort, others rely on payroll staff to manually select the correct pay period. Employees qualify for EI benefits based ROE-reported insurable hours. If insurable hours, for the pay periods covered by the ROE, are wrongly reported, even by as little as a single hour, employee rights to EI benefits can be jeopardized.
So what’s the best practice in these situations? The best practice is to avoid payroll advances, to the greatest extent possible.
Virtually everyone nowadays has access to a credit card, overdraft privileges or a line of credit at their bank or other financial institution. Alternatively, if payroll advances are truly employee loans, employers can escape the related source deduction and reporting requirements, by charging interest at CRA prescribed interest rates. Charging interest at prescribed rates avoids any taxable benefit implications and eliminates the need for source deductions or remittances on advance amounts themselves.
If payroll advances are made mid-month to employees otherwise paid monthly, a better practice would be to convert to a semi-monthly or bi-weekly payroll. Especially for salaried employees, there is very little extra administration involved in running a full payroll, rather than just providing employees with a mid-month advance.
If payroll is not receiving notification of exception pay, such as overtime, in time for current pay period processing, this should trigger a review of the related payroll practices.
One issue might be paying employees up to the last day in the pay period (“paying current”), rather than with a 4 to 6 day gap between pay period end and pay day (“paying in arrears”). Paying in arrears is a best practice, since it provides payroll with sufficient time to ensure exception pay events are processed in the period in which they occur.
Another issue might be that employees only question shortages in their pay after payroll has been finalized and pay statements have been received. A better practice would be to provide feedback on exception pay items as these are received for processing. For employers with time and attendance self-service and workflow functionality, it should be a simple thing to add employee notifications to the exception pay approval process. If for example, supervisor approvals are only received after cut-off, employees can be told in advance that pay for this will not be received in the current period.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (250) 228-5280 or visit www.alanrmcewen.com for more information. This articles was first posted to Canadian HR Reporter on January 14, 2014.