In my role monitoring employee benefits in the news, I consistently see financial security concerns in the headlines. The Federal Reserve Board reports that 40% of people can’t cover a $400 unexpected expense. Seventy-eight percent of people are living paycheck to paycheck, according to a CareerBuilder survey. This can happen at any income level; around 10% of people earning a salary above $100,000 are in the paycheck to paycheck cycle.
What’s the problem?
There’s a need for same-day pay services for several reasons, Rachel Schneider of the Aspen Institute Financial Security Program told the Associated Press. Income and spending needs are volatile and don’t always match up. While some households might be able to budget over the course of a year, they could end up short in any given month, she says. Some workers can build up savings to provide a cushion, but for many workers, the cost of living—including housing, education and health care—is outpacing wage growth by such a wide margin that “expecting them to save their way out of volatility is not realistic,” Schneider says. Student loan or other debt often cancels out income growth.
According to a survey from NORC at the University of Chicago, almost half of households indicated they would turn to credit cards if they needed money for essentials but didn’t have any savings. Seventeen percent would take a payday, auto, or other type of short-term loan. With interest rates in the 400-800% range, short-term loans are extremely costly and difficult to repay.
What’s a potential solution?
Same-day pay is referred to in many ways: instant pay, advance pay, expedited pay, fast pay, flexible pay or early wage access. What it means is employers are allowing employees to receive their earned pay before the payroll cycle ends. Another way to think of it is giving an employee access to a paycheck before it is deposited.
What are the potential benefits of same-day pay for employees?
- Employees can request an instant transfer of any part or all of their available earned wage balance to pay for an unexpected expense instead of using a credit card or borrowing the money.
- By viewing earned wages, employees can make informed budgeting and spending decisions and avoid fees from bounced checks, overdrafts and late bills.
- Note: Employees can choose to have their purchases and ATM withdrawals declined if they don’t have enough money in their account. Read more from the Consumer Financial Protection Bureau on how to reduce or eliminate overdraft fees.
- Employees can plan ahead by requesting extra work shifts if they see a shortfall in their earnings for the current pay period.
What do employers need to consider?
- Vendors. There are many vendors in this space. True instant-pay vendors are companies that have agreements with employers and are integrated with payroll. Payroll service providers are taking notice of the trend, according to Bloomberg Tax.
- Features. Vendors and their supporting apps have a variety features: check balance, earnings transfer, automatic savings deposit into separate account, financial education, budgeting tools, coaching from financial advisors (e.g., FlexWage product OnDemand Pay has a partnership with Sum180). Employers should compare the features with their workforce needs.
- Fees. If an employer wants to offer instant pay as an employee benefit, then the employer will pay all the fees. For minimum wage and/or part time workers, fees can add up to hours of work. That being said, there are employer-subsidized and employee-pay-all fee options. The types of fees vary. Some are flat rate per month, per pay period, per transaction; variable based on how quickly the employee wants the money (same day versus next day); or a combination of these.
- Safeguards. To address the concern that employees won’t have anything left to receive on payday, employers may want ensure the transfer option isn’t overused. Limits can be set on the number of transfers allowed per pay period and/or the dollar amount or percentage of pay advance allowed, typically 50% of earned pay.
- Return on investment. Measure the effect of this benefit on recruitment, employee engagement and turnover.
- Legal issues. Attorneys Karen M. Morinelli and Lara J. Peppard at Ogletree Deakins point out potential legal issues:
- Review state and local laws regarding passing along fees to employees
- Stay compliant with all federal, state and local minimum wage, overtime and payday requirements.
What are other employers doing?
Here are some examples of what early adopters of same-day pay apps are doing.
- About 20% of the 1.5 million U.S. employees at Walmart use the app Even. According to Even’s website, Walmart employees get the first month free; after that the employee pays $6 per month, while every third month is free (because the fee is paid by the employer). Matthew Boyle of Bloomberg explains that Even gets access to Walmart employees’ bank account information, payroll data and work schedules. Using that data, Even has a cash-flow projection feature called “OK to spend” that deducts upcoming bills from expected pay and shows users an “okay to spend” balance.
- General Health System, a nonprofit hospital, works with the vendor PayActiv and was named a 2019 PLANSPONSOR of the Year. About 15% of the hospital’s nearly 4,000 employees use the app. Employees are allowed to take up to 50% of earned wages—to a maximum of $500 per pay period—for a $5 fee per pay period in which an advance is obtained. The app provides education about managing cash flow.
- Uber and Lyft have used instant pay as their model for years. For access to earnings in real time, drivers pay around $0.50 per transfer, and transfers may be limited to five per day.
- The labor shortage, especially in the restaurant, retail and food delivery industries, led to a next-day-pay pilot offering at some Church’s Chicken restaurants through the vendor Instant Financial, Leslie Patton of Bloomberg explains. Employees can access 50% of their pay the day after their shift, and all fees are covered by the employer.
Time will tell if same-day pay as an employee benefit gains more traction. Employers must do their research before selecting a vendor. Some apps include financial education and budgeting tools that could get employees to a more financially secure place. Employer-paid fees are advantageous to employees and essential to avoid contributing to the problem of the cost of living outpacing wage growth.
Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation
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