How Timely Payroll Supports Employee Retention and Business Stability

Nearly 775,000 companies with fewer than 50 employees miss at least one payroll per year, according to Gusto research. That’s more than 3.4 million workers affected annually, and the numbers have been growing rapidly in recent years. The implications of this are stark, particularly where timely payroll and employee retention are concerned. But what many don’t realize is that making payroll without fail is essential to the health of your business, too. We’ll take a look at the mechanics behind this and what you can do about it below.

Timely Payroll and Employee Retention Are Linked in Many Ways

When asked if they would consider leaving their job over repeated payroll issues, just 22 percent said no in HiBob surveys. One in three employees says they’ve actually done it, per Yomly.

Delayed Pay Leaves Employees without Options

At a minimum, payroll delays create logistical problems for most employees. In all, 57 percent say they’re living paycheck to paycheck, Yahoo! Finance reports. Younger Americans are more likely to express this, with 72 percent of Gen Z and 65 percent of millennials saying they do.

Naturally, this means delays create further strain, with 78 percent saying they’d have difficulties meeting their current financial obligations if payroll were delayed for a week, per Payroll.org.

Late Payroll Reduces Morale

The impact of late payroll on morale is multifaceted. On the one hand, we know that money is tight across America, and that payroll issues can force people to leave their jobs regardless of how they feel about their work or employer. But it’s important to consider what’s happening in the minds of employees as payday approaches.

Overall, 54 percent say they feel stressed or anxious or are focused on budgeting in the week leading up to a payday, HiBob research shows. And, 45 percent say financial stress impacts their job performance.

This only worsens when payroll actually comes late. Although 53 percent say it would be inconvenient but manageable if payroll was delayed by a few days, 29 percent say it would cause severe financial distress. 

In other words, not only are they not focusing on their work, but all that stress and anxiety becomes associated with the company and plummets morale. People don’t stay where they’re not happy, so retention drops even if people can logistically manage delayed pay.

Bear in mind, this creates a ripple effect. The people who are left behind are typically forced to carry the extra work, and they’re doing it without their teammates, which reduces morale further.

Trust Evaporates When Paychecks Are Late

Trust evaporates the instant pay comes into question, and it takes considerable time to earn that trust back, if it can even be earned back at all. If an employee can’t count on you for timely payments, particularly in an era where delays create extreme hardship for many, what can they count on you for?  This lack of trust also causes employees to leave.

Loyalty Diminishes with Each Passing Day

Nine in ten employees say the way a business manages payroll reflects how much they respect and value employees, per HiBob surveys. These are often key factors in loyalty, as well as some of the other areas covered earlier, such as morale and trust. Even your best employee may start to evaluate their options when payroll can’t be trusted.

Timely Payroll and Business Stability Are Also Linked

Recognizing that payroll delays and employee turnover are linked is a good start, but this only scratches the surface in terms of how the business is impacted.

Headcounts Drop for Years

Employees who leave take their institutional knowledge with them. They leave behind gaps in information, process, and execution that others have to fill. This creates issues that can ripple through a business.

While many live by the mantra that everyone is replaceable, that’s not what happens when employees are lost due to payroll issues. Small businesses typically see a headcount reduction of eight to ten percent after a single missed cycle, per Gusto. Moreover, recovery typically takes two years. 

This is two years in which the business has sustained knowledge gaps, process issues, and employee overburden. The load creates the perfect environment for burnout, further increasing morale and turnover issues.

Engagement Reduces

Engagement is one of the best fortifiers against turnover. Think of it as a person’s willingness to go beyond the basic requirements of their job. It’s their passion for what they do and for the company’s mission.

This can be measured on a broad scale, as in, companies with higher engagement also have lower turnover. But, interestingly, it can also be seen in organizations that have high turnover overall. Research shows that in companies like this, where turnover is high, departments with higher engagement are insulated from the effects. They actually see 21 percent less turnover, according to Gallup.

But because engagement represents an employee’s willingness to go the extra mile, it also means businesses with lower engagement experience a multitude of issues their counterparts don’t.

Productivity Plummets

Nearly half of all employees say waiting for pay negatively impacts their focus or attendance, per Gallup.

In terms of focus, it’s often tied to financial pressure. For instance, over 39 percent say they’ve had to pay overdraft, payday, or late fees in recent months. Payroll delays increase the likelihood of this occurring. Over 37 percent say they’ve taken a second job, such as driving for Uber, to improve their cash flow. These additional hours prevent employees from feeling refreshed and focused at work, reducing productivity and often contributing to burnout. Disengaged employees are more likely to miss work, too.

We can also see that the inverse is true. Strong engagement serves as a fortifier against absenteeism. For instance, business units with high engagement report 78 percent less absenteeism, per Gallup. Their productivity is 14 percent higher as a result.

Reputation Takes a Hit

Word about missed payrolls spreads fast. Employees leave bad reviews about the company on platforms like Glassdoor, which makes it much more difficult to recruit talent later. Clients and prospective clients learn about the issues, which can make them question the stability of the company and whether it’s still safe to do business with you.

Compliance Issues Emerge

At the federal level, most compliance concerns center on areas such as labor and tax laws. Concerns about timeliness are typically addressed at a state level. Depending on your state, delayed payroll may result in hefty fines or even criminal charges.

Additionally, around one in six businesses say they experience litigation issues tied to payroll issues annually, EY reports.

Costs Increase

All these things increase your costs to operate. For instance, replacing an employee typically costs between 50 and 200 percent of that person’s annual salary, per SHRM. Meanwhile, unscheduled absenteeism amounts to nine percent of payroll, TriNet reports.

Customer Outcomes Diminish

Customer satisfaction gets a boost when employees are willing to go the extra mile. Not surprisingly, this translates to improved customer outcomes in multiple areas. For instance, sales productivity jumps by 18 percent, and customer loyalty gets a 10 percent boost, Gallup reports. Payroll delays erode the foundations that allow for this.

Profit Drops

By now, it’s probably easy to see how factors like engagement, payroll trust, and business performance go hand-in-hand. But research backs it up, too, with engaged business units seeing a 23 percent increase in profitability, per Gallup.

You Can Avoid Payroll Disruptions with a Few Simple Measures

Given the complexity of payroll processing, there’s a lot that can go wrong. However, the issues tend to fall within a few specific categories, such as processes, data accuracy, and financial planning. Shoring up these areas can make your payroll runs go much smoother.

Improve Technology and Processes

Strengthening processes and technology is the first line of defense against payroll delays.

• Automate Payroll: Investing in payroll software helps eliminate errors and streamlines processes.
• Outsource to a Small Business Payroll Management Specialist: Working with an external partner can help you stay on track with deadlines while ensuring your business stays compliant with all laws and regulations.
• Maintain Systems: Ensure all hardware and software are up to date to ensure no hiccups occur when payroll needs to be run.
• Implement Time-Tracking Solutions: If your team is still submitting hours or pay requests manually, consider switching to specialized time-tracking software. When employees log hours in real time, processing isn’t held back while you wait for their documentation.
• Cross-Train Payroll Duties: Even if one person owns all payroll duties in your company, ensure at least one other person learns how to carry out the duties so they can keep payroll on track if the primary employee is absent.
• Educate the Staff: Teach the team how your payroll system and tools work, so they can do their part to ensure accurate and timely paychecks. 

Ensure Data Accuracy

It’s often argued that the average payroll error rate is around 1.2 percent. However, EY found that a typical company only had an 80 percent accuracy rate. While these errors won’t necessarily delay payroll unless you pause to review and correct them all, they undermine trust, loyalty, and engagement the same way payroll delays do.

• Set Clear Deadlines: Have hard cutoff times for submitting timesheets, reviewing payroll, and running the batch or submitting data to your payroll company.
• Verify Employee Information: Double-check the information employees provide during onboarding and ask them to review and update it periodically.
• Perform Payroll Audits: Once you have strong systems in place, run quarterly audits to ensure deadlines are being met and that errors are not found.
• Monitor Overtime and Bonuses: Keep a close eye on how overtime and bonuses are handled in paychecks, as these areas tend to have more errors than others.

Eliminate Cash Concerns

Just over two percent of small businesses are unable to process a payroll due to insufficient funds in any given quarter, per Gusto. Some industries are harder hit than others.

For instance, roughly five percent of businesses in wholesale trade or professional services have missed payroll due to insufficient funds. Six percent of manufacturing companies, seven percent of construction companies, and eight percent of transportation companies say the same.

• Improve Cash Flow for Payroll Consistency: Nine percent of small businesses have tight payrolls each month, Gusto notes. This often occurs in the industries noted above, as well as in industries like temporary staffing that have thin margins and high payroll costs. To improve cash flow management, explore ways to reduce and slow payables while accelerating and increasing receivables to ensure funds are available for payroll. Also, leverage cash flow forecasting to identify shortfalls before they hit.
• Build a Cash Buffer: On average, small businesses that have never fallen short on payroll have around four months’ of payroll on hand, per Gusto. Those that have fallen short hold only about a month of payroll expenses. If building a large cash buffer seems unrealistic for your small business, try to set aside a small amount every month and treat it like a payable.
• Have Backup Payroll Funding Ready: Funding payroll during slow periods or even rapid growth can be difficult. Have backup payroll financing or funding ready for these moments.

Boost Employee Retention Through Payroll Stability with Factoring

Invoice factoring is often an ideal form of payroll funding because it’s fast, doesn’t create debt, and is more accessible than traditional financing and credit cards. It works by unlocking the cash trapped in your unpaid B2B invoices, eliminating the wait for customer payments.

Because the cash comes from your invoices, no debt is added to your balance sheet. Approval for invoice factoring is based on the strength of the customers who owe on those invoices, not your credit score or time in business. It’s also quick. If you have a few common business documents ready when you apply, you can be approved in less than a day. Plus, you can receive your factoring advance the same day you submit your invoice, so it’s easier to make payroll even when unexpected issues arise.

Partner with Viva for Your Payroll Funding Needs

Supporting small businesses across the nation for decades, Viva Capital offers credit lines as high as $15 million, rates as low as 0.25 percent, and advances up to 100 percent of the invoice value, minus a nominal fee for the service. Plus, you can get established and not tap into factoring until you need it, making it your silent, but ever-ready, payroll funding partner. To explore the fit or get started, request a complimentary rate quote.