Several payroll services allow employees to be paid on demand rather than wait every two weeks. Is on-demand payroll right for your small business?
- On-demand pay enables employees to receive their wages before their next normally scheduled payday.
- On-demand pay allows employees to take home either one day's wages or all the money they earned during the pay period thus far.
- Employees and employers can benefit from on-demand pay, though fee, tax and calculation challenges exist.
- This article is for employers and employees interested in learning about on-demand payment as an alternative employee payment method.
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.
What is 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.
Key takeaway: On-demand pay allows employees to access their wages before their next regularly scheduled payday.
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How does on-demand pay work?
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.
Key takeaway: Through on-demand pay, employees can take home one day's worth of money or all the money they have earned between the last pay period and that day.
What are some examples of on-demand pay services?
Among the services placing more pay control in the hands of workers are Instant Financial – used by restaurant chains like McDonald's, Taco Bell and KFC – and Even, used by 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. [Interested in payroll services? Check out our best picks and reviews.]
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.
Key takeaway: Instant Financial, Even and Gusto's Cashout program are examples of on-demand pay services.
The pros and cons of on-demand pay
On-demand pay comes with several advantages and drawbacks for both employers and employees.
The pros of on-demand pay for employees include:
- Quicker payments. With on-demand payment, employees don't have to wait until their next payday for money. This flexibility allows employees to receive, save and spend their money on their own schedule.
- A financial safety net. If an employee is suddenly facing unexpected bills or other urgent payments, on-demand pay can help the employee quickly cover these expenses.
The downsides of on-demand pay for employees include:
- Fees. Just as some people argue that paying ATM fees to withdraw cash means paying for money, some employees may feel frustrated that they must pay fees to receive their wages on demand. In cases where on-demand pay will be used to cover unexpected bills, employees may feel that these fees add insult to injury.
- Taxes. Most on-demand pay services don't tax employee withdrawals. However, these withdrawals are not tax-exempt. Instead, employers must deduct these taxes from an upcoming paycheck, thus possibly making the check worth even less than the employee anticipated.
The advantages of on-demand pay for employers include:
- Better employee retention rates.. Employees whose employer has implemented on-demand pay may interpret this offering as proof that the employer cares about their well-being. As such, employees may feel less compelled to leave the employer.
- More productive employees. Personal finance challenges can distract employees. Offering on-demand pay may give employees a larger financial safety net and thus limit this distraction.
The cons of on-demand pay for employers include:
- Pay errors. Implementing on-demand pay introduces a chance, albeit a minor one, that employees will receive paychecks that include hours paid on-demand. This can lead to employers paying the same wages twice.
- Taxes. Employers must deduct taxes on on-demand wages from standard paychecks issued later. Employers who forget or fail to do so may face consequences from the IRS.
Key takeaway: Both employees and employers benefit from on-demand pay, but fees, taxes, and calculation errors can present challenges.
Additional reporting by Max Freedman.