Hey accounting fans! We are back with part 2 of the first-time employer’s blog. This episode, Sam Harith – The Comic Accountant and Ashleigh the Advocate are going to be talking about PAYE issues and 90 day trial periods. If you missed part 1, read it over here.
So to kick it off:
PAYE – it’s your problem, not your employees!
Sam here,
One of the biggest challenges when hiring a new employee is having to deal with PAYE issues. What is PAYE you ask?
PAYE stands for Pay-As-You-Earn. PAYE systems are commonplace throughout the world with many countries requiring that employers deduct taxes on behalf of their employees and pay it to the government. What this means is that if you are an employee, whatever salary you receive has had its taxes deducted from it by your employer. It’s the LAW!
How does PAYE work?
Easy, on each pay run, you deduct a certain amount based on the annual income that your employee is earning. This percentage is worked to be your employee’s effective tax rate for the financial year. If you are reading this blog, you are likely to be living in a country with a progressive tax rate that scales with your level of earnings. If you forgot what an effective tax rate is, go on over here and read this blog I wrote about how tax rates work.
Let’s say for example that Johnny works a job for D’vious Technologies as a social media manager. He has an annual salary of $65,000 a year. Based on this, his employers have calculated that his effective tax rate for the year is close to 18%, so with each payrun, Johnny will have 18% worth of taxes deducted from his paycheck.
So what happens to that 18% of PAYE?
That 18% ends up in the employer’s PAYE owing account which is also known as Accrued PAYE, PAYE liability or PAYE to pay(e) – (ok ok I made that last one up).
As the employer you are obligated to return this amount to the nice people at the tax authorities (we Kiwis LOVE the IRD!) and record the amounts paid for each and every single one of your employees that you paid.
At this point, you might be thinking – aw heck, PAYE doesn’t sound THAT hard, I can easily calculate tax on the two bros who work my gardening/landscaping business.
Well buddy, when you start pulling in more employees (IE more than 3) then PAYE starts becoming a nightmare. Once you get it wrong, then the penalties, interests and general bad vibes start piling on and you find yourself nose-deep in PAYE legislation instead of focusing on running your business.
So what is a small business owner to do about PAYE?
Easy – use a payroll system. There are plenty of them out there that will calculate your employee’s hourly rate, work out their effective tax rate, file it with the tax authorities and tell you exactly how much you need to pay each month in terms of PAYE. Some payroll systems even pay the PAYE (heh, pay the PAYE) for you.
I have a few systems I enjoy working with here in NZ, systems which are in no way affiliated with this website like Thank You Payroll, Xero and MYOB. Have a quick search on what sort of payroll systems are suitable for your country and industry! It may cost a bit of money, but it will save you plenty of heartache and distress.
Speaking of heartache and distress, read on more to find out how to avoid more of these by understanding how 90 day trial periods work
90-day trial periods
Ashleigh here, a lot of the stuff I talk about here is relevant to NZ employment law – but your country may also have similar regulations which you should be aware of.
In NZ, You may include a 90-day trial period if you employ less than 20 employees. This clause is one of the optional clauses contained within the MBIE employment agreement builder, link above.
90-day trial periods are useful for small employers, as it allows them the flexibility to employ an employee without vigorous interviewing processes. If an employee is on a 90-day trial period, the employer may terminate their employment without reason, and the employee will not be able to raise a personal grievance; caveats below.
These trial provisions are often tarnished in employment law, but they don’t have to be. As an employer, here’s what you can do to create a fair and reasonable trial period while also preserving the company’s interests:
A fair and reasonable trial period is..
- You can choose to reduce the length of the trial period to a period that you believe will provide you with certainty that the employee is performing. The act states that the trial must not exceed 90 days, but there is nothing stopping the employer from implementing a 30-day trial period. Trial periods can cause great anxiety, and a shorter notice period can provide the employee with greater certainty.
- You can provide the employee with a fair notice period. Many employers provide the employee with only one-week notice during the 90-day trial period, but this can be extended to provide the employee with greater certainty. The length of notice period will not impact your ability to rely on a trial period; you can provide notice on the 90th day.
- You can set frequent meetings during the trial period to discuss the employee’s performance and integration into the team. It is important to be transparent, and if there are any issues you can give your employee the opportunity to fix them; rather than simply dismissing the employee.
- You can withdraw the 90-day trial period at any time. If you believe that your employee is performing well and integrating into the team, you can write to your employee confirming that the 90-day trial no longer applies. This will provide the employee with certainty with their employment.
However, it is important that you implement the trial period correctly. So you should be aware of..
..‘Loopholes’ that an employee may be able to raise a personal grievance for:
- You must ensure that the employment agreement has been signed by the employee prior to the commencement of employment. Failure to do so will cause the trial period to be invalid.
- You must provide the employee with enough time to seek legal advice on their employment agreement. I recommend that the employer provide the employment agreement to the employee at least one week prior to the proposed commencement date. Failure to do so will cause the trial period to be invalid.
- Do not materially alter the wording of the trial period clause provided by MBIE. There are a number of provisions that must be included for the trial to be valid. I recommend that you regularly update your template, using the template builder, to ensure that this clause is always up to date.
- If the company has 20 or more employees at the time the employee’s employment commenced, the trial period will be invalid.
- The probation period is not the same as a trial period, and you will be required to follow a fair and reasonable process if you wish to terminate an employee’s employment on this basis.
If in doubt, please seek advice.
In the final part of our blog, we will be looking at record keeping and being an overall awesome employer! Stay tuned and Stay positive!