Earned wage access has become a popular benefit among employees. While it offers financial flexibility to both salaried and hourly workers, it is particularly in demand for hourly workers. When financial stress in the workforce is high, earned wage access can provide employers with a powerful incentive for recruitment and retention.
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In this article, we will explain what earned wage access is, how it works, and what makes it so popular among employees. We will also examine the pros and cons employers should consider before deciding to implement it.
What is Earned Wage Access?
As workers struggle to balance financial priorities and keep up with fast-paced inflation, it can become difficult to wait for bi-weekly or monthly paychecks. Earned wage access allows employees to access their net earned pay prior to their employer’s next payday. It is also known as called same-day pay, on-demand pay, and instant pay.
How Often are Employers Required to Pay Employees?
There is no federal requirement for pay frequency. The Federal Labor Standards Act (FLSA) covers the rules for overtime and wage calculations but does not specify pay frequency. It is worth noting some states require employees in certain occupations get paid at least twice each month. Most employers choose to pay employees either weekly, bi-weekly, semi-monthly or once per month.
Employees Prefer Flexibility of Same Day Pay
Earned wage access was started by several fintech companies in order to solve the problem of providing timely pay to gig workers such as Uber and Lyft drivers. However, the ability to use wages as soon as they were earned became very popular, and demand grew swiftly among traditional employees outside the gig economy.
Research from Harvard Business Review shows “more than 60% of American workers think all employers should offer earned wage access.” As a result, where hourly workers make up a majority of the workforce, advisory firm Gartner expects one in five U.S. companies to offer on-demand pay by 2023.
How Does Earned Wage Access Work?
When employers offer earned wage access, workers can use a mobile apps to request their earned wages before the employer’s regular payday. They can opt to receive all or part of the wages, with appropriate taxes and fees taken out. Then, they can choose whether payment gets transferred to their bank account or a payroll card.
What’s the Difference Between Earned Wage Access and Payday Loans?
It’s important to distinguish between earned wage access and payday loans. Essentially, same day pay allows an employee to receive pay faster for work already performed. A payday loan is a bridge between pay cycles.
With earned wage access, employees can tap into the pay they have already earned but would normally not receive until the next payday. By contrast, a payday loan is a short-term, high-cost loan against what an employee expects to earn in their next paycheck. Payday lenders tend to charge exorbitant fees simply to establish the loan, followed by interest rates as high as 390% or more.
Pros and Cons of On-Demand Pay
Earned wage access delivers important perks for employees and employers. Let’s look at the top five benefits:
PRO: Powerful recruiting tool. Employers can use the flexibility of earned wage access as a recruiting tool to entice hourly workers to join the company. For example, CBS News recently reported that several fast-food chains and retailers such as Wendy’s, Taco Bell, and Big Lots already offer same day pay to their hourly staff. Furthermore, nursing homes and home health agencies have started adopting it as well. Offering earned wage access increases applicant volume.
PRO: Helps reduce turnover. This benefit is an important differentiator between employers. A 2021 Harris Poll found “78% of workers between the ages of 18-44 said on-demand pay would increase their loyalty to an employer.” Once employees have experienced same day pay, they are less inclined to leave for a job with an employer that doesn’t offer it.
PRO: Helps employees save money by paying bills on time. Unpaid bills stress employees and also can negatively impact their credit rating and financial wellbeing. Late payments also mean late fees or potential service shutoffs. On-demand pay providers estimate the average employee can save hundreds, if not thousands in avoided late fees, bank overdraft fees, and interest on payday loans.
PRO: Provides financial wellbeing to employees. The majority of working Americans live paycheck to paycheck; it’s especially prevalent among hourly wage earners. A 2022 survey by Bankrate found “only 44% of U.S. adults could cover a $1,000 unplanned emergency.” Earned wage access provides a bit of a financial cushion when cash is tight, and employees can gain peace of mind knowing they have the option if an emergency strikes.
PRO: Better attendance and more hours worked. Earned wage access apps give employees clear transparency into their daily earnings and accrued earnings. In addition, employees who need cash fast would be more willing to pick up extra shifts knowing they can access their paycheck immediately.
There are also a couple of potential uncertainties employers should consider:
CON: Possibility of new regulations. State and federal regulators, including the Consumer Financial Protection Bureau, are taking a closer look at fintech earned wage access platf
orms to ensure fees are not too high and employees are receiving good value for a service that continues to grow so quickly in popularity.
CON: Potential fees for employees. There are a number of third-party providers of earned wage access for U.S. businesses. Some charge a service transaction fee to provide same-day transfer of funds to employee bank accounts, and these fees could add up if employees chose to access small amounts of their pay on a frequent basis. However, employers can work with payroll providers to mitigate this potential drawback and instead deliver earned wage access as a fee-free benefit up to a certain number of times per year.
Giving your workforce earned wage access can deliver a much-appreciated employee benefit with powerful implications for recruiting, retention, and employee satisfaction. It is important to find a quality provider with excellent service that will not charge your employees high fees. Contact Asure to find out how your business can offer earned wage access to employees today!