On-Demand Pay: Benefits, Challenges & Best Practices
In the modern workplace, people value flexibility. On-demand pay is another method of introducing flexibility into your employer value proposition.
Here we’ll delve into what on-demand pay is, the benefits for organizations and employees, and how you can approach it.
What Is On-Demand Pay?
On-demand pay, also known as earned wage access, is a financial service that allows employees to access their earned wages before their regular payday.
So, if they’ve already worked a few shifts or hours, they can get paid early for that work, often through an app or payroll platform.
It's a way to offer more flexibility and financial control to employees without having to wait for the typical bi-weekly or monthly bi-weekly payroll schedule.
How On-Demand Pay Works
At any time, employees can view their accrued wages and request an advance. This advance is then quickly transferred to their bank account by automated direct deposit. On payday, the advanced amount is deducted from their regular paycheck.
The process is commonly facilitated through the use of digital platforms, such as Paycor or Deel payroll software, that allows employees to log in through a self service portal and also help handle taxes and legal requirements.
Types Of On Demand Pay
There are a few types of on-demand pay, depending on how the system is set up. Here are the main ones:
- Earned wage access (EWA): This allows employees to access a portion of the wages they've already earned before their regular payday. The amount they can access is usually based on the hours they've worked up until that point—it’s like getting an advance on your paycheck.
- Instant pay: This is a more immediate version, where employees can get paid in real-time for the hours they've worked. It might be available after each shift or even daily.
- Paycards: Some companies offer on-demand pay through paycards, where employees can load their earnings onto a prepaid card and use it right away.
- Third-party platforms: These are third-party apps or services that partner with employers to provide on-demand pay options. Employees can use these platforms to request and receive early payment of their wages.
Benefits Of On-Demand Pay For Workers
On-demand pay can offer several benefits to employees, mainly related to relieving financial stress in a tough economy.
Financial flexibility
It’s estimated that around 4 in 10 American households can’t cover a $400 emergency expense. On-demand pay can help people deal with unexpected expenses and emergencies and take advantage of discounts.
Reducing reliance on high-cost loans
A 2021 HR Exchange On-Demand Pay Survey, nearly 20 percent of respondents said their employees use payday loans.
Payday loans have high-interest rates (often 400% APR or more), and a report from the Consumer Financial Protection Bureau found that 1 in 5 payday loan borrowers end up in a cycle of debt.
On-demand pay helps break that cycle by providing a more affordable, reliable alternative.
Improved financial planning
When combined with other financial wellness tools and education, on-demand pay can assist in better budgeting and financial planning.
Benefits Of On-Demand Pay For Employers
Of course, on-demand pay can offer several benefits to employers as well:
Enhanced recruitment and retention
On-demand pay is a popular perk amongst workers. For example, an ADP survey found 75% of workers across all age groups say it's important for their employer to offer earned wage access and 93% of employers who offer it say it helps them attract new talent.
Similarly, in a New Harris Poll From IntelyCare and DailyPay, 71% of healthcare workers said they’d be more likely to remain at a job if their employer offered an on-demand pay benefit than if they didn't offer one.
Bottom line is that offering on-demand pay can make a company more attractive to potential employees and help retain current staff.
Improved employee morale and productivity
A PwC study found that 60% of full-time employees are stressed about their finances (and I’d imagine this is even higher amongst temporary or shift workers), and this negatively affects their mental health.
If used effectively, on-demand pay can help relieve some of this stress, leading to more focused, satisfied, and productive workers.
Also, if someone lacks the means to pay for childcare for example, they’re unable to pick up extra shifts or maybe even make their designated shift.
Reduced requests for pay advances
By providing a structured way for employees to access earned wages, employers can reduce the administrative burden of handling ad-hoc pay advance requests.
Small businesses can enhance these benefits by utilizing top-rated payroll solutions for SMBs that are tailored for their needs.
Challenges Of On-Demand Pay For Workers
While beneficial in principle, on-demand pay won’t alleviate any fundamental money management issues and there are some things workers may need to be aware of.
Overuse or dependence
If employees have easy access to their wages before payday, they might be tempted to overuse it. This can lead to poor financial habits or a reliance on the service, which could result in cash flow problems in the long run.
Fees and charges
Some on-demand pay services charge fees for accessing earned wages early. These fees can add up, especially if employees are using the service frequently. Workers may inadvertently end up paying more than they intended to access their wages.
Financial stress from frequent withdrawals
While on-demand pay can help in the short term, it could also encourage workers to manage their finances poorly if they’re constantly accessing wages early instead of budgeting.
This could lead to a cycle of financial instability or them missing the opportunity to save for longer-term goals.
Challenges Of On-Demand Pay For Employers
There are also some challenges employers need to be aware of if introducing on-demand pay:
Additional costs
Setting up an on-demand pay system might require a significant upfront investment. Employers may need to partner with third-party providers, and there could be software integration, platform fees, or service fees to consider.
Managing employee behavior
While on-demand pay can offer flexibility, it may also cause employees to become less focused on long-term financial planning. Employers might have to consider whether frequent wage access could undermine employee savings or lead to financial instability for some workers.
Financial risk
Employers may be on the hook for any errors or issues related to pay. If an employee accesses more wages than they’ve actually earned or there’s a mistake in the calculation, it could result in financial discrepancies and the need for additional back-end support to fix issues.
Impact on cash flow
On-demand pay services typically require employers to pay out wages on demand, even if the employee hasn’t yet worked the hours to justify it.
For smaller businesses, this could impact cash flow, especially if a large portion of employees choose to access their wages early.
5 On-demand Pay Best Practices
With the above in mind, here are best practices to help ensure that on-demand pay becomes a valuable tool for enhancing recruitment, reducing turnover, and enhancing overall workplace well-being.
1. Clear communication with employees
Like with most things in life, communication is key. This means being transparent with employees about any associated fees or costs for using the on-demand pay service.
I’d also recommend providing training or resources to employees explaining how they can use on-demand pay, the benefits, and potential downsides (e.g., dependency or fees). The more informed they are, the more likely they are to use it responsibly.
Author tip: Present on-demand pay as a benefit that gives workers more flexibility over their pay schedule, not as a solution for poor financial planning.
2. Set limits
While you want to offer flexibility, it might be wise to prevent employees from overusing the service.
Consider setting a limit on how often employees can access their earned wages—such as only a certain percentage of their wages per pay period.
3. Encourage savings and financial wellness
Since on-demand pay can make accessing wages easier, it’s a great opportunity to offer employees resources that promote financial wellness.
For example, offering workshops on saving, budgeting, and managing debt can help employees avoid financial stress.
4. Choose the right provider
If using an external service, compare providers to understand their fee structures, features, and integrations with your existing payroll system. Look for a provider that aligns with your company size, budget, and employee needs.
5. Monitor usage and feedback
Monitor usage data and regularly survey employees to understand how they feel about the on-demand pay option. Are they using it frequently? Do they feel it’s helpful or causing any financial challenges? This feedback helps you adjust the system if needed.
Final Thoughts
Attracting and retaining talent is a perennial business concern and offering on-demand pay is a nice perk that many people appreciate.
Payroll software with this option can make the process easy from an administrative perspective.
To help mitigate any recklessness on the part of workers, perhaps limit the amount they can withdraw early to a certain percentage of their paycheck and offer other financial wellness benefits such as financial literacy programs.
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