For nearly a century, payday has come every week or two for most employees. However, in a world of instant gratification, those days could be ending. Research from CareerBuilder shows that more than three-quarters of full-time workers in the U.S. are living paycheck to paycheck. A growing number of payroll services are reducing the length of time between each payday. These payroll companies are giving workers the chance to collect a paycheck after each workday. This emerging model is known as on-demand pay.
On-demand pay is an employee payment method in which employees can receive their wages as they earn them. Often, employees can only access a certain portion or maximum limit of their wages per pay period – the rest is paid as usual on the employee’s next standard payday. This service is offered by both payroll processors and companies that are focused only on providing on-demand pay service to employees.
While the fee to use on-demand pay options is typically included in the costs a payroll provider charges, companies offering this service typically charge a fee. However, unlike payroll processing, where the employer pays the fee, these companies charge the employees for the service.
With on-demand pay services, employees can decide after each shift whether they want to get paid for that day or for the days since they were last paid. On-demand pay services give employees the freedom to decide how they want to get paid and provides them some reassurance should an unexpected expense occur.
Before offering on-demand pay services, it is important to have a clear understanding of how payroll processing works in general. Having that knowledge will ensure you are prepared to make a decision on what type of payroll schedule you want to offer.
Among the services placing more pay control in the hands of workers are Instant Financial – used by restaurant chains like McDonald’s, Taco Bell, KFC, and even Walmart. With these services, employees receive a smartphone notification when they’re done working for the day and can then decide if they want to collect a paycheck that day. If they do, the money is either transferred to a prepaid debit card or deposited directly into their bank accounts. [Read related article: What is a Paycard?]
While such services as Even and Instant Financial are add-ons employers use in addition to their payroll service, many payroll providers are offering this feature. Gusto, Paychex and Paylocity are among the payroll services offering on-demand pay.
Gusto’s Cashout program enables employees to choose their pay schedules. Cashout allows both salaried and hourly employees to choose their payday and get paid as soon as the next day. Gusto advances money (up to 40% of the employee’s paycheck, with a maximum of $500) to the employee, depositing funds either to their bank account or onto a Gusto debit card. Borrowed funds are automatically repaid through the employee’s next direct deposit paycheck. [Need help? We researched the best payroll service companies so you don’t have to.]
Reeves said the two-week pay schedule, which the Bureau of Labor Statistics reports is used by nearly 37% of employers, is a relic of calculating payroll taxes manually and was instituted in the U.S. almost 90 years ago.
“Our children already enjoy a better payroll system than we do, as they get paid after they mow the lawn or babysit, while we wait for days and weeks,” Reeves said. “With modern technology, people shouldn’t have to wait to get paid for the work they’ve already completed.”
Nelson Lichtenstein, a history professor at the University of California Santa Barbara and director of the Center for the Study of Work, Labor, and Democracy, said while the concept may sound appealing to employees, he envisions more turmoil than stability.
“I think this creates more chaos and insecurities,” Lichtenstein said. “If you get paid every single day, you are scrambling every single day.”
Without having to wait for payday, you lose a built-in buffer that currently exists, he said.
“The two-week thing is kind of like a form of forced savings,” Lichtenstein said.
Lichtenstein believes receiving a lump sum every two weeks gives individuals more freedom to plan where that money goes. Getting paid every day, though, may place undue stress by having to prioritize where funds should be spent.
“It just strikes me as exacerbating the endemic insecurities of the bottom half of the working class,” Lichtenstein.
One of Lichtenstein’s concerns is the cost involved in using such services. Some payroll services charge the employer, while others charge the employees a fee to withdraw their money early.
If employees are taking on the cost, Lichtenstein said it could add up quickly. Even at $3 or $5 a day, it could cost employees a significant portion of their paycheck when spread out over an entire year.
“It’s a nicer version of payday lending, but it is still payday lending,” Lichtenstein said.
Gusto’s service is free to both employers and employees. Reeves said the company has the data and insights to advance money to employees and consequently offer the program.
Despite his reservations, Lichtenstein says the concept could “spread like wildfire” given the millions of Americans living paycheck to paycheck.
Businesses interested in offering Cashout to their employees are advised to contact Gusto. There are eligibility requirements that companies must meet to offer on-demand pay to their employees.
If you do decide to offer on-demand pay services, you may be better served moving to a completely paperless payroll process. Having everything done digitally will be a huge timesaver with not everyone being paid on the same day.
On-demand pay comes with several advantages and drawbacks for both employers and employees.
The pros of on-demand pay for employees include:
The downsides of on-demand pay for employees include:
The advantages of on-demand pay for employers include:
The cons of on-demand pay for employers include:
Additional reporting by Max Freedman.