Guide to On-demand Pay: What You Should Know
This article is part of a larger series on How to Do Payroll.
On-demand pay, also known as earned wage access and instant pay, is a method to pay employees their wages as they earn them vs waiting until payday. With this method, employees can choose to receive their pay daily or collect all of their earned wages on any given day. This is different from the traditional employee pay method in which employees have to wait to receive their wages on a scheduled pay date.
One thing to keep in mind is that on-demand pay is not the same as a payroll advance. With on-demand pay, an employee can only request money for which they’ve earned during the current pay period; with a payroll advance, they can request portions of their paycheck before they earn it.
How On-demand Pay Works
Typically, the on-demand pay process flows in this order:
- Employee decides how much money they need from their paycheck: An employee decides how much of the wages they’ve earned since their last paycheck they’d like to withdraw. Keep in mind that some on-demand pay providers have limits as to how much employees can withdraw of what they’ve earned—50% of earned wages is common. There are also sometimes limits on how much can be withdrawn per pay period or per day. Most on-demand pay apps will show the daily balance available for withdrawal after each work day. Some will even send the employee an alert with a prompt for them to withdraw funds.
- Employee makes a withdrawal request and provider sends the money to their account: Once the employee requests the amount they want, the provider sends the funds to their account, as long as it doesn’t exceed the balance they’ve earned for the period. For instance, if an employee earns $1,000 per week, and they’re closing out the first half of the week, they should have $500 available to withdraw. If they request $600, their request will be denied, and they’ll be forced to enter a lesser amount. In some cases, this request will need to be approved by the employee’s manager, the HR team, or both for accuracy and compliance with your company’s policy.
- Employee receives funds: The employee receives the funds they requested into an account of their choosing. There may be a transfer fee deducted, especially if sending the money to a bank account. Some providers will deposit funds to money management apps like Cash App for free.
- Other fees could include a subscription fee, which may be based on a time period; a transaction fee, which may be based on the number of employee payments; or a merchant fee, which can be a percentage of an employee’s payment.
- Some examples include DailyPaycharging workers up to $2.99 for an instant transfer and up to $1.99 for a next-day transfer and Branch charging anywhere from $2.99 to $4.99 depending on the amount to be transferred.
- Employer processes payroll: At the end of the pay period, you’ll be ready to process payroll; at this point, you can deduct any amounts the employee withdrew from their total net pay amount to determine how much of their remaining funds you owe them.
Tip: It’s better to go through a payroll or on-demand pay provider, like Gusto, than to try and manage this process yourself. They typically have limits in place (like the 50% of earned wages limit we discussed above) to protect your company against potential federal labor violations. All employees must receive at least minimum wage (currently $7.25 per hour per federal law) for the pay period and any overtime pay they’re eligible for. Doing payroll calculations manually or on your own can make it hard for you to keep track of the actual taxes owed, hourly rate, etc.
Laws Affecting On-demand Payroll
Because on-demand payroll is just starting to become more popular, there are some outdated state laws that haven’t yet caught up. If you opt to offer this benefit to your employees, we encourage you to research your state laws and if possible, speak with a legal expert.
By definition, some states (Florida, Alaska) consider any paychecks received in advance, regardless of whether they’re earned or not, a loan, and thus subject them to applicable laws, like those governing what you can and cannot deduct from employee paychecks.
Here are an additional few rules that states have on the books that affect on-demand payroll:
- Ohio limits all early payroll payments, even though they’re earned, to paying court-ordered spousal or child support.
- In New York, an early payment that assesses interest or charges a fee does not qualify as on-demand pay and may not be reclaimed through payroll deduction. And remember, although you may not charge a fee, most on-demand apps do.
- Some states prohibit employers from linking pay cards to any form of credit; if you want to load the funds to an employee pay card and your state looks at on-demand pay like a loan, this will be problematic.
- Some states won’t allow you to load funds to a payroll card if there are fees involved.
For more specifics on running payroll in each state, check out our state payroll guides.
Pros & Cons of On-demand Pay
On-demand pay comes with several advantages and disadvantages for both employers and employees alike. Click through the tabs for some of the main issues to consider before making a decision.
On-demand pay is popular among employees and can be a key factor in attracting and maintaining talent, as well as boosting your employees’ engagement.
A recent Ceridian study highlights many workers’ feelings about on-demand pay.
- 81% say that on-demand pay could be a contributing factor in their accepting a job offer.
- 80% would prefer to have their pay automatically deposited into their accounts when it is earned.
- 78% claim that on-demand pay would increase loyalty with their employer
These feelings have become more pronounced since the pandemic as financial distress among employees has increased.
According to a recent Ernst & Young study, 20% of employee turnover can be attributed to financial stressors, including expenses due before payday and gaps between work periods.
What’s more, a recent study by PYMNTS shows that 61% of Americans live paycheck to paycheck. This impacts employees in all income brackets, although unsurprisingly, this percentage is negatively correlated to income.
These stressors can cause or worsen the health, wellness, and work performance of your employees and lead to increased turnover, which can negatively affect your company in a variety of ways.
The cost of replacing an employee can be anywhere between 50% to 200% of the annual salary of the departed employee. Other negative effects of employee turnover include decreased company productivity, lower employee morale, and, ultimately, a decrease in sales.
Implementing on-demand pay can reduce the financial stresses that many employees face today.
Employees who feel financially secure and like they have more control of their wages will feel more connected to your company. That engagement leads to increased customer satisfaction, productivity improvements, and a better company culture. Financial wellness programs, which can include a comprehensive on-demand pay program, have become a much more utilized company benefit over the past decade, according to PwC.
Note: Company-sponsored financial programs and training are typically a much better alternative than outside services like payday loans. Before on-demand became popular, payday loans were an option for employees who needed to receive funds before their next scheduled pay date. However, payday loans typically carried high interest and were dependent on being approved based on their income and credit profile.
Interested in learning how payroll on-demand differs from a traditional payroll advance? Check out our payroll advance guide.
While a few on-demand pay companies may charge initial implementation fees, maintenance charges, or fees based on the number of employees using the service, many on-demand pay companies provide their services at no cost to employers, meaning there’s no charge to join the program—there are still fees for employee funds transfers. This makes it one of the few company wellness benefits that can be provided without a direct increase to the company’s budget.
There are some ethical and logistical concerns of implementing on-demand pay that companies need to consider before offering as a choice to employees. Some of these concerns include:
On-demand pay providers may not be under the same scrutiny as your own business. One specific example of loosely regulated activities are the employer and employee fees of using these programs. The lack of regulations means that the on-demand provider may be able to provide services that run afoul of your own payroll compliance, especially in states like California.
Because this is a relatively new program, employers have to keep up to date on state and federal legislation to make sure that they remain in compliance.
In the cases where employees must pay the cost to receive their wages on-demand, they are “paying” for their own funds. While the fees may equate to the same charges as an out-of-network ATM, there is a major difference. The ATM fee can be considered a convenience charge whereas the on-demand fee can be considered a punitive fee for those living paycheck to paycheck or having a financial emergency. These types of fees can create a cycle, where the employee consistently has to take money out on nonscheduled paydays to pay for expenses, thus accruing more charges and receiving less money per check.
Some companies do not have the internal time keeping, human resources, and IT systems that can handle being a part of a real-time system that pays employees daily. For example, do employees directly enter their information in a timekeeping system that is connected with your payroll system? Are salary rate changes and employee status changes (terminations, leave of absence) entered in time to avoid miscalculations? These items will need to be in place for on-demand pay to work as expected.
Regardless of the support of the on-demand pay providers, there may be additional work for your organization. This work may be answering employee inquiries, recording payroll deductions, and ensuring that taxes are taken out appropriately. Checking in with your team will allow you to understand if and how many additional resources are needed for implementation and ongoing maintenance of an on-demand pay program.
Check out our how to do payroll guide for step-by-step instructions on processing your payroll.
On-demand pay can be a positive benefit to your current employees and help with recruitment of new employees as it provides more financial flexibility and freedom. Providing financial literacy resources, evaluating your current people operations process, and thoroughly researching your on-demand pay options will help make the process seamless for both your participating employees and your employees tasked with the implementation.
Need options on how to get your employees paid? Check out our guide on the top ways to pay employees.