Don’t you wish you could get paid just a day earlier? In a perfect world, we’d all probably wish that money would just get added to our bank accounts at the same time that we worked, but that also means someone has to be running payroll at all hours of the day—I’m not sure we’d wish that on our own worst enemy. In any case, we do seem to be getting closer and closer to at least finding ways for people to access their paychecks earlier and closer to when they actually worked. Earned wage access has been increasing in popularity over the years, but its usefulness and whether or not it should be regulated is something that is still in question. Arkansas recently enacted its own law that will regulate earned wage access in the state, which has only reignited the debate surrounding the service among business owners and employees alike.
At Payday HCM, we’ve fielded many questions about earned wage access—sometimes called wages on demand—from current and potential clients. We’ve seen how payroll has evolved over the years, and earned wage access seems to be another innovation in the industry. As such, businesses are questioning whether or not to move over to an earned wage access model. Employees are also considering whether or not something like earned wage access might be beneficial to them. Generally, a lot of us are wondering: What are the pros and cons of earned wage access?
Well, in this article, we’ll be going over the pros and cons of earned wage access, also known as wages on demand. We’ll briefly cover what earned wage access is before diving into the benefits and drawbacks the service has for businesses and individuals looking to utilize the service alike. We’ll be sure to outline both the advantages and disadvantages here so that, whether you’re a business owner looking to offer the service to your employees or an individual looking to utilize an earned wage access provider, you’ll have all the information you need to make the best decision for you or your business.
In this article, you will learn:
- What Is Earned Wage Access?
- What Are The Benefits Of Earned Wage Access?
- Are There Disadvantages To Earned Wage Access?
What Is Earned Wage Access?
Firstly, before we dive into the pros and cons of earned wage access, we first need to establish what earned wage access is.
The Origins Of Earned Wage Access
So, while we said earlier that we’ve witnessed a number of innovations to the payroll industry over the years, that was maybe a bit of an exaggeration. Since the Electronic Transfer Act was passed in 1978, not too much has changed in the payroll landscape. What’s more important to note here is the changes in the economic and technological landscape, however.
Obviously, we all know how much technology has changed with the introduction of smartphones and, more notably for our purposes here, the introduction of mobile payment apps like Venmo have shifted how we think about sending and receiving money. This, alongside the increasingly precarious financial situation for working-class individuals and families, has led to many rethinking how people receive their paychecks.
According to the Consumer Financial Protection Bureau, almost 37 percent of households report that they could not cover their expenses for longer than a month in the situation of loss of income. These kinds of conditions have helped to give rise to services like earned wage access.
Earned Wage Access (Or Wages On Demand)
Essentially, earned wage access allows workers to receive a portion of their paycheck early, prior to the receipt of their full paycheck. While this is often a benefit offered by the employer, this typically involves partnering with an earned wage access provider—Payactive or DailyPay are popular ones—to provide employees with their wages early.
Employees can then go into the app and request a portion (typically capped at about half of their paycheck) of their check early. In some cases, transfer fees may apply depending on the speed of the transfer. These fees will be deducted from the requested amount. The advance amount would then be deducted from the final paycheck, which would be received on the normal date.
It’s important that these EWA apps are different from other cash advance apps you might be able to download to your smartphone. EWA apps are linked to an employer’s payroll and can deduct amounts as it relates to a paycheck. Cash advance apps, however, are not associated with an employer and often will require more fees.
What Are The Benefits Of Earned Wage Access?
Now that we’ve covered the basics of what earned wage access is, we’ll dive a little deeper into the potential benefits of using EWA.
Accessing (Some Of) Your Paycheck Early
Obviously, the biggest benefit to using EWA is receiving a portion of your paycheck early. This is something that can be extremely helpful in cases of an unexpected expense or if you simply just want to access some of your next paycheck early.
As we stated earlier, many working-class homes are struggling to live paycheck to paycheck. In the past, many households have had to rely on things like payday loans, which often accrue more in fees ($520 on average) than are actually offered on the loan ($375 on average), according to Pew Charitable Trusts. Not only that, but most borrowers will need to renew or reborrow these loans, with 80 percent of payday loans being taken out within two weeks of repayment on a previous loan.
Talent Recruitment And Increased Productivity
From a business standpoint, offering EWA to your employees can help you to not only stand out amongst other businesses when recruiting potential employees, but alleviate the financial stress of your employees—and, in turn, increase productivity.
According to Benefits Pro, employees with financial worries are 5.8 times more likely not to be able to finish their daily tasks—this financial stress among workers in the U.S. amounts to 2.5 percent of the total U.S. GDP. A study from Harvard Kennedy School found that employees who have access to EWA have a 12 percent lower probability of leaving a company.
Are There Disadvantages To Earned Wage Access?
Now that we’ve covered the potential benefits of wages on demand, we’ll go a little further into the potential drawbacks of EWA.
Is Earned Wage Access A Loan?
One of the biggest questions and concerns surrounding earned wage access and wages on demand is whether the service is a loan. If it is, our point earlier about EWA serving as a helpful alternative to payday loans doesn’t hold as strongly for those potentially seeking out the service.
There isn’t a clear answer to this question. A report published by the National Consumer Law Center found that individuals who use EWA can end up in a similar borrowing cycle to those who use payday loans, using the service an average of 36 times a year and achieving an APR of around 330 percent.
What’s important to note here is that the NCLC is measuring data from service providers who do charge fees to provide advance payments. The NCLC doesn’t completely advise against offering EWA, but it does encourage employers to offer EWA that doesn’t include any transfer fees.
This somewhat aligns with an advisory rule published by the Consumer Financial Protection Bureau which would have more specifically clarified whether these EWA services function as loans. The advisory rule found that these services operate more like credit, with employees paying back a form of “debt” with the amount deducted from their paycheck. The CFPB also distinguishes between employer-provided EWA and private EWA services.
Reduction Of Paycheck Amount And A Potential New Habit
Other drawbacks to offering an EWA service include the aforementioned establishment of a new cycle of debt from those who use the services, as well as an overall reduction in the actual amount received on an employee’s paycheck. Employers who offer this service should be aware of the potentially harmful patterns that could arise from offering this service.
Ultimately, as the NCLC points out, EWA is not a good alternative for offering higher wages to employees who are struggling to make ends meet. Employers should consider raises in pay as a safer alternative to helping combat potential financial issues employees may face and using EWA strictly as a benefit, not as a solution.
Make Every Day Payday With Wages On Demand
Waiting for payday can sometimes feel like that moment in a cartoon when a character is stranded in a desert and is crawling in exhaustion across the arid dunes. Eventually, they stumble upon an oasis: a perfect watering hole amidst the dry desert sand. They greedily scoop handfuls of the water into their mouth, basking in the divine joy of having found the one bit of respite amongst a hostile and destitute landscape. Of course, this is until they realize it was nothing more than a mirage, with the handfuls of water they thought they were drinking actually just being handfuls of sand. Offering a service like earned wage access, however, can help bring that mirage out of the realm of dreams and into reality—when used cautiously, of course.
Curious to learn more about how you can implement earned wage access at your business? Check out Payday’s wages-on-demand service and start your earned wage access journey today.
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