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Grow Your Business Finances

Is On-Demand Payment the New Payroll?

Is on-demand payment the new payroll?
Credit: Rawpixel.com/Shutterstock

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.

With research from CareerBuilder showing that more than three-quarters of full-time workers in the U.S. are living paycheck to paycheck, there are a growing number of services giving employees the opportunity to shorten the time between each payday. These services and payroll companies are giving workers the chance to collect a paycheck after each workday.

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With the new payday 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. It gives employees the freedom to decide how they want to get paid and provides them some level of safety should an unexpected expense pop up that wasn't on their radar.

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 pre-paid debit card or deposited directly into the employees' 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, payroll provider Gusto is now testing this feature as part of its core online payroll software.

Gusto launched its Flexible Pay offering in Texas in June. Similar to how the other services work, it enables employees to choose their pay schedules. Flexible Pay allows both salaried and hourly employees to choose their payday and get paid as soon as the next day. Gusto advances money to the employer to pay participating employees. [Interested in payroll services? Check out our best picks and reviews.]

"Flexible Pay can help people stay on top of their finances or react to sudden expenses without using payday loans or other high-interest loans like credit cards," Josh Reeves, Gusto founder and CEO, said.

Reeves said the two-week pay schedule, which the Bureau of Labor statistics reports is used by nearly 37 percent 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 the director of the Center for the Study of Work, Labor, and Democracy, said while the concept may sound appealing to employees – especially those in the working class who struggle paycheck to paycheck – 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. "I guess I am in favor of it."

Lichtenstein believes getting a lump sum every two weeks gives you more freedom to plan where that money goes. Getting paid every day puts employees in more of a scramble mode every day of deciding where their money might be spent.

"It just strikes me as exacerbating the endemic insecurities of the bottom half of the working class," Lichtenstein.

One of his concerns is the cost involved in using such services. Some charge the employer to give employees the benefit of getting paid daily, or 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 end up costing 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 because of Gusto's foundation as a payroll provider, the company has the data and insights to advance money to employers and consequently offer the program. He said Gusto understands an employee's actual income, how often they work, whether they've worked recently, and when they were last paid. Gusto also knows a lot about the business, such as how often they are paying employees and when they run payroll.

"We're advancing money to the employer, so Flexible Pay doesn't impact a business's cash flow or create complications with their taxes or back office operations," Reeves said. "People who prefer their regular pay schedule can opt out of Flexible Pay, but we suggest enrolling to stay ahead of any potential financial or other life emergencies."

Despite his reservations, Lichtenstein says the concept could "spread like wildfire" given the millions of Americans living paycheck to paycheck.

Reeves said he believes this is the type of pay structure businesses should always have been offering and said Gusto plans to roll out its Flexible Pay option to additional states soon.

Chad Brooks

Chad Brooks is a Chicago-based writer who has nearly 15 years' experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.