Whether you call it ‘earned wage access’, ‘instant pay’, ‘on-demand pay’, ‘pay on-demand’ or ‘wages on-demand’, this employee benefit is one of the fastest growing employee wellness programs in the market. Nearly 3 out of every 4 U.S. employees (72%) want access to their wages before their pay day, according to The UKG Workforce Institute study. With the increasing demand, there’s been a massive explosion in the number of companies offering earned wages on-demand to employees. You will find many employment ads that state “work today, get paid tomorrow” in their job offering. It is becoming a competitive advantage for employers to offer this high demand pay flexibility and to that end it’s also becoming increasingly difficult for all businesses and, particularly small businesses, to navigate this arena.
Most employees are pretty much paid the same way they have been for a century. They work, and then a week or two later receive payment for that time worked. In the interim, they have expenses and bills to pay, and this scenario often creates a cash-flow shortfall. Earned wage access is the ability for an employee to access a portion of their paycheck in advance of their regularly scheduled payday.
It is something employers can offer on their own, and here are two ways it can be accomplished without engaging a service provider:
The first and most obvious is to increase the frequency of payroll runs. If you currently pay monthly, change to bi-weekly. If you currently pay bi-weekly, change to weekly. You get the idea; simply change your pay frequency to a more frequent basis. There are some challenges with this approach:
- It requires you to manage the cash flow. So as a business owner, if your receivables do not align with this increase in payroll frequency, you could find yourself in a cash flow deficit.
- How much time does your payroll department have? This will certainly increase their workload.
- Are you using a payroll system that even allows you to do that?
- How much will it cost you to run this each pay-run?
A second option is that you can provide cash advances to those employees in need of their wages early. Here’s an article on some of the pitfalls of providing employee loans or advances that I wrote a few years ago and some other points to consider:
- Make sure you have an employee loan agreement template drafted by or reviewed by a lawyer.
- Establish an employee loan policy that in no way, shape or form, could be viewed as discriminatory.
- Set proper rates and terms, and ensure you do not reduce the amount of an employee check to less than mandated minimum wage.
- Understand the potential financial risk and recourse in the event an employee departs prior to the amount being repaid in full.
Neither of those two options for the do-it-yourselfer may be ideal. The better solution is to outsource. Ideally, this works by allowing the provider an integration into your payroll/HRIS system. This integration will help smooth the employee sign-up process and will allow the service provider to read pay and time worked data in order to calculate if an employee has worked and how much they’ve worked. The on-demand pay provider will then send the employee the amount available to request. The process is completed when the provider is “repaid” via a deduction or direct deposit posting on the employee profile on the next pay run. The key differences of having a third party offer this service is that your financial risk is limited, as the terms of the advance are between the third party and the employee, and that this service is an advance against current earnings, not a loan against future earnings. By providing this option to your employees, you can remain competitive in this very tough labor market to attract employees, and accomplish it without affecting your cash flow, with no risk or expense. The icing on the cake is that this benefit can be added, in most all cases, at no cost to the employer!
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