Salary is at the center of every rewards package. Whether it is calculated at a yearly or hourly rate, wages go to employees every two to four weeks. It’s one of the few aspects of employee reward that has stayed largely the same for decades.
On-demand pay, where employees can access a portion of their accrued wages immediately, offers businesses a chance to make pay a bigger reward. It also allows companies with tight wage budgets the chance to compete with multinational corporations.
It’s a flexible and empowering tool, but it’s not without issues or challenges. In this post, we’ll navigate both to help you evaluate whether adding on-demand pay to your total reward package is the right move.
What Is On-Demand Pay and How Does it Work?
On-demand pay, also known as earned wage access, allows employees to access a portion of their accrued earnings immediately, rather than waiting until payday to receive their salary in a lump sum.
The idea is to give employees access to wages that are rightfully theirs, helping them to improve their personal cash flow, and give them access to instant funds should a large, unexpected expense occur. The service is usually offered by a third-party provider that charges a fee to the employees who use their service.
The process looks something like the below:
- Employees choose how much of their earned wages they want. Some providers may place limits on the amount workers can withdraw. Fees may also change depending on the amount.
- The provider sends the money. If the request meets the provider’s requirements and doesn’t exceed the amount the employee has earned up to that point, then the provider will send the money directly to the employee’s bank account, minus fees.
- Employer takes withdrawals into account at payroll. At the end of the employee’s pay period, the employer will deduct the amount the employee withdrew early before processing payroll as normal. There’s usually no charge to employers who offer this service.
On-Demand Pay Can Increase Employee Satisfaction
Employees like not having to wait weeks for their earned wages.
According to a survey by The Harris Poll for payroll company Ceridian, 83 percent of U.S. workers believe they should have access to earned wages at the end of each workday. Further, 78 percent said on-demand wages would increase their loyalty, and 79 percent said it would make them feel more valued.
On-demand pay can thus be a powerful weapon in the war for talent. In Canada, for instance, Ceridian HCM found that 43 percent of employees said they would find an employer that offers on-demand pay more attractive than one that doesn’t. That figure rises to 59 percent for workers aged 18 to 34.
It can also help you keep existing workers. Research by Mercator and DailyPay found that access to on-demand pay can increase employee tenure by as much as 73 percent in some industries.
This makes on-demand pay vital in some industries, says Evelyn McMullen, a research manager at Nucleus Research. “As talent acquisition challenges continue, and with hourly staff quick to leave for other employment opportunities due to financial strain, employers are left to deal with the costs associated with replacement and new hire training,” she writes.
“This makes offering on-demand payments in hourly industries no longer a ‘nice to have’ perk but rather a necessity for attracting and retaining high-performing employees.”
And Improve Employee Financial Well-Being
Employees are worried about their finances. Research by PwC finds that 60 percent of full-time employees are stressed about finances, which is even higher than the number stressed during the pandemic. Well-paid workers aren’t that much better off, either. Almost half (47 percent) of employees earning more than $100,0000 are worried about finances.
That’s not surprising given the results from Bankrate’s latest annual emergency savings report. Bankrate’s survey found that 49 percent of U.S. adults had fewer savings than they did a year ago and that less than half (43 percent) would be able to pay for an unexpected emergency from their savings.
By giving employees instant access to cash in the form of on-demand pay, businesses can go some way to relieving the financial concerns of their employees. They also help them to rely less on credit cards, loans and other forms of financial support that come with high interest rates.
Doing so can also increase their productivity. SoFi finds that employees spend 9.2 hours at work each week dealing with personal finance issues. Alleviate some of those financial worries, and employees can be more focused during office hours.
Legal and Regulatory Issues Are a Cause for Concern
Perhaps the biggest hurdle to adopting on-demand pay as a reward are the legal issues that surround it. Chief among them are outdated laws that can hamper well-meaning businesses.
For example, some U.S. states like Florida and Alaska classify paychecks received in advance as loans, writes Charlette Beasley, an author at Fit Small Business.
There are tax withholding concerns, too, Ogletree Deakins’ Michael K. Mahoney, Stephen Kenney and Zachary V. Zagger write. “If on-demand pay is considered paid the day employees request that employers pay them, employers may not be meeting their deposit obligations or properly calculating withholdings if they continue to perform these tasks weekly, bi-weekly, etc.”
Ethical Considerations Can Also Be a Concern
Giving employees access to earned wages isn’t as altruistic as it may seem on first blush.
For starters, employees end up paying for access to wages that they would otherwise get for free. Some may choose to think of this as a convenience charge. In reality, however, it’s actually a penalty fee for those living paycheck to paycheck.
Those fees can be substantial, says the editorial team at Mailchimp’s Courier blog, and it has meant regulators are taking notice of the industry.
“While not quite the high interest rates of payday loans, these fees aren’t insignificant – especially if an employee is using the service repeatedly – as the National Consumer Law Center (NCLC) found: ‘A $100 advance taken out five days before payday with a $5 fee or “tip” is equivalent to an annual percentage rate of 365%.’”
Worse still, the fees associated with on-demand pay could cause further issues, says Nelson Lichtenstein, a history professor and the director for UC Santa Barbara’s Center for the Study of Work, Labor, and Democracy.
“It just strikes me as exacerbating the endemic insecurities of the bottom half of the working class,” Lichtenstein tells Business News Daily. “It’s a nicer version of payday lending, but it is still payday lending.”
Proceed with On-Demand Pay With Caution
On-demand pay seems less like a fleeting trend and more like a perk that will become a core feature of reward packages for years to come.
But that doesn’t mean organizations should throw caution to the wind. In order to navigate the issues mentioned above, organizations should ask themselves a few questions:
- The first is who will bear the costs, says Nick Green, a financial journalist at Unbiased.
- The second is whether your business can deal with the payroll irregularities that on-demand pay can cause. “On-demand wages could make that more erratic, even chaotic, so it will be important to get your employees to set regular dates (even if these are several times a month),” he writes.
- Finally, ask yourself whether you understand how this perk fits into your existing total rewards package and how to communicate any changes to your employees.
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