What Is On-Demand Pay and How Can It Benefit Employers and Employees?

In an era of same-day shipping, on-demand movies, and ubiquitous mobile access, individuals are increasingly expecting prompt access to nearly anything they need. For employees, this also means getting quick access to their paychecks.

Fortunately, employers don't have to change their payroll schedule to meet this need; instead, they can leverage an on-demand pay service to their employees through their payroll provider.

What Does On-Demand Pay Mean?

On-demand pay, also known as earned wage access (EWA), is a payroll service that allows employees to access some or all of their wages as they are earned. Rather than waiting to receive a bi-weekly or monthly paycheck with wages earned from the previous payroll period, employees using on-demand pay can have more control over their finances — choosing if and when to access their earned income before the next payroll cycle.

How Does On-Demand Pay Work?

For employers, offering on-demand pay may be as simple as contracting with a payroll provider or on-demand pay service to enroll the company's employees. Generally, employers can offer earned wage access without needing to make daily payroll calculations or change their current payroll process, as everything to facilitate pay-on-demand is typically handled through the service provider.

Typically, fees for this service are incurred on a per use basis and only by employees who use it, making this a simple addition to an employee benefits package. Employees who want to access wages before the next regular payroll cycle can elect to do so, and they can also choose to use the service one pay period but not the next. This provides maximum flexibility for each employee to use the service in a way that best fits their needs. Any pay that is not accessed early will automatically be paid on the regularly scheduled payday.

On-Demand Pay Compliance

Before contracting with a payroll service to offer on-demand pay options, employers should understand how to implement a pay-on-demand program in compliance with applicable laws. Employers may have the option to pass some or all of the cost of a pay-on-demand service to their employees, but doing so can have legal implications. For example:

• When some or all of the cost of a pay-on-demand service is passed to the employee, the federal government views this as the employer offering advanced credit to the employee until payday. This means the employer is then required to provide certain disclosures on the associated fees and allow employees to rescind payouts within a designated time frame under the Truth in Lending Act.
• When all of the cost of a pay-on-demand service is covered by the employer, the program may be considered a "Covered EWA Program" and, if so, is exempt from Truth in Lending Act requirements under a Consumer Financial Protection Bureau (CFPB) ruling.

The CFPB ruling specifies that a Covered EWA Program must include all of the following characteristics to comply with Truth in Lending Act requirements for an on-demand pay program:

• The provider of a Covered EWA Program contracts with employers to provide the on-demand pay service (i.e., employers do not issue on-demand pay transactions directly from the company to employees).
• The amount of each transaction through the Covered EWA Program does not exceed the cash value of the employee's earned wages at the date and time of the withdrawal.
• The Covered EWA Program does not charge any fees to employees who opt to access the service.
• The provider of the Covered EWA Program recovers any on-demand pay amounts only through a standard payroll deduction process on the employee's next regularly scheduled paycheck.
• The provider of the Covered EWA Program retains no legal or contractual remedy, directly or indirectly, against an employee in the event of a failed or partial payroll deduction.
• The provider of the Covered EWA Program clearly and conspicuously explains to employees that:
  • there are no associated fees;
  • the provider retains no legal or contractual remedy in the event of a failed or partial payroll deduction; and
  • the provider will not engage in any debt collection activities.
• The provider of the Covered EWA Program does not perform credit checks of individual employees in order to determine eligibility for program participation.

Additional compliance requirements at the state level may also apply to employers who choose to offer EWA programs to their employees.

How Long Does On-Demand Payment Take?

Once an employee initiates a request to access wages on demand, the exact timing may vary based on the service provider and the employee's banking institution. Most on-demand pay providers will provide same-day transfers if the request is made before a certain cut-off time in the day with next-day transfers for all other requests. Depending on the employee's bank, however, it can take an additional 1-2 business days for the employee to receive the funds.

On-Demand Pay Benefits to Employers

While many employers are looking for helpful, low-cost benefits to offer employees, the price tag for offering on-demand pay isn't the only benefit to employers. In fact, integrating pay-on-demand into the company payroll system can save organizations money in multiple ways.

Higher Productivity

Employees may be distracted at work by personal finance issues and may spend working hours thinking about or trying to resolve the problem.

By helping improve employees' financial flexibility, employers can cultivate a less distracted and more productive workforce. If an issue does arise, employees can use the pay-on-demand feature when they need help.

Improved Engagement and Retention

Financial stress doesn't just cause a decrease in productivity — it could lead to lower levels of pay satisfaction from employees, increased absenteeism, and increased turnover rates.

Employers can offer the perk of quick access to pay as a recruiting incentive and engagement tool. With on-demand pay, staff members know that they can have private, secure access to their earned wages if needed without the embarrassment of asking the employer directly.

Better Relationships With Employees

By providing this helpful service, employers can demonstrate their commitment to helping employees find a healthy work/life balance and maintaining good physical and mental well-being. This can increase communication and trust, leading to better relationships and more loyal, dedicated employees.

On-Demand Pay Benefits to Employees

Having access to earned wages on their terms can give workers a sense of empowerment and financial stability, potentially leading to happier, more productive employees. In addition to providing quick access to money, on-demand pay can benefit your employees in several other ways.

Financial Management and Wellness

A Federal Reserve study found that over 35% of adults would not be able to cover an emergency expense of $400 with cash or its equivalent if one arose. When emergencies occur, many workers turn to payday loans, credit cards, or other high-interest stop-gap options that often exacerbate the problem. If employees have access to a low-cost way to resolve financial emergencies quickly, they can better maintain financial stability without going further into debt, even in the face of unexpected expenses.

Reputable on-demand pay providers will often provide a comprehensive employee portal that allows workers to quickly access earned wages. The portal may also include access to financial wellness tools and training materials to help employees maintain financial stability over the long-term.

Physical Well-Being

Stress has long been known to cause significant health problems, and financial issues are a leading cause of stress for employees. By helping to reduce financial worry and stress, employers can help their employees maintain a healthy work/life balance and do their best work while on the job.

Additionally, providing employees with more control over their pay can improve their overall quality of life. Pay-on-demand services can improve employees' mental mindset, decrease distractions and resulting work accidents, and reduce medical costs due to stress-related illnesses.

Issues of Pay-on-Demand

While on-demand pay offers multiple benefits to both employers and employees, there are still some factors to consider before implementing a program. By carefully exploring these factors, employers can be better equipped to roll out an on-demand pay program and clearly communicate all the facts to their employees.

Per-Use Transaction Fees

Not all on-demand pay service providers are created equal. While some companies offer the service at a reasonable cost, others may be offering a payday loan in disguise. If you have your employees' best interests in mind, review the fee schedule associated with using the service. In addition, determining who will cover any associated fees may affect your compliance requirements as the employer. Make sure to work with a reputable provider and that you understand your compliance requirements.

Long-Term Financial Stability

For those workers who are living paycheck to paycheck, constant use of an on-demand pay service, even a reasonably priced one, may perpetuate a cycle of financial mismanagement. Help your employees get on the path to long-term economic stability by choosing a service provider that offers more than just access to earned wages. Financial wellness tools and education can help employees make better choices today to build a stronger tomorrow.

Constructive Receipt

To the IRS, constructive receipt means that employees must pay taxes on all earned income, even if it is not physically received. Depending on the service provider, workers may be unpleasantly surprised when they receive a paycheck after an early access of earned wages and a comparatively high amount of taxes is taken out. That's why it's important to educate employees on this process in advance to avoid misunderstandings.

Consider Offering On-Demand Pay to Your Employees

Working with a reliable payroll provider can help you offer your workforce flexibility in getting paid when they want, how they want, and in a way that benefits both employer and employee. Learn more about pay-on-demand options available for businesses.