I went by the "You level when you get the XP" in the rulebook, and it worked well. The mundane classes just got the benefits of "Hey, I can actually do this" that is the difference between a Thief, a Warrior, and a wannabe. One of my players actually said it was like, after facing the C.L., they realized that they were actually competent.
Clerics become clerics via spontaneous election. I.e., the god reaches down as much as the cleric reaches up, so I had no problems there.
Wizards and elves don't actually know any spells they can cast without 1 week study per spell level and a roll, so there was no problem there. Elves know Patron Bond, but I didn't think I had to worry about the party stopping for a week at this point.
Having run SotSS for more than one group, the C.L. seems to be where most people level IME, and no group I have run it for has voiced any sort of cognitive dissonance at levelling in this manner.
BUT.....They avoided the robes and crushed the skulls, so in a manner of speaking, they made their bed, not you. If there is a TPK, I would recommend letting the dice fall where they may. Players generally deserve to experience the results of their decisions, for good or ill, and even TPKs in DCC need not suck. Ask them to roll up new 0-levels, and then open the scene a year later, where the funnel is escaping the growing shadow of the newly-arisen Chaos Lord.
Not using XP per the book was your decision, though, and you may wish to ameliorate the effects of that somewhat. You can consider having the sacrificial victims provide some aid, and you can even go so far as to have some Power of Law shine down upon them as battle is about to be joined, upping the hit points of the Lawful by 1d6, the Neutral by 1d3, and the Chaotic by 1. Whether these are temporary boons or permanent increases is up to you.
Remember, too, that if they recovered the band of fire, anyone can make a spell check using 1d10, and you might be more generous to wizard's apprentices and suchlike.
The one thing that I would NOT do is change the rules in mid-play because the players are not doing as well as expected. If they know you are not levelling in mid-adventure, and you change your mind, the implication will be that you are protecting the party. IMHO, that robs victory of its sweetness ("We won because the judge pulled his punches"), and makes the sting of defeat far worse ("Why didn't he save me this time? I guess he just likes Sue better."). I encourage you not to do this.
Best of luck with it.
Thanks for the thoughtful post. I went back and forth with the leveling thing and have kept an open dialogue with my players so I don't think that will be problematic and as you said that seems common where most groups level up right about there. I am not going to pull punches as you said it's not fair to the players or the story. They will suffer the consequences of not handling the robes, skulls etc.. very well. They also didn't get that band of fire due to poor rolls on the search so they are going in pretty naked but again that's their problem. The decision not to do XP from the beginning was a poor decision on my part but it's easily fixable, party still has to live with their decisions as they will find out soon. My biggest issue is that I wrote down I was going to level mid adventure and somehow I got in my scatter brained head that I wasn't going to do that so really im just going back to what I decided to do originally. Hopefully the players don't have an issue but I will have to live with that if they do.
It's the melee classes that are harder to explain to me as far as leveling up but I guess you can explain experience in a million different ways. Wizards and elves absolutely need a few weeks to study so I don't think that will be a problem. I also already planned on letting commoners who were freed help the party if they made a morale check first. I do appreciate the advice and I already had an introduction of Klazath the Lawful War God so I may take your temporary boon of HP idea. They still haven't figured out how to bypass the C.L. anyways so things are still pretty tenuous.