How to use on-demand pay strengthening recruitment model

Introducing on-demand pay

On-demand pay, also known as earned wage access, is a practical benefit that can help employees survive financial hardships, especially when emergencies arise. Employers hire a third-party service to provide employees money they have earned ahead of the allotted pay check distribution period. Employees can avoid overdraft fees, late fees, or high-interest loans, and payday loans. The companies that provide these on-demand pay services to employees are solving real-world problems with innovative solutions.

Considering that, according to ABC News, four in 10 Americans cannot cover an unexpected expense of $400, this service can come in handy. For example, say the water heater breaks at the home of an employee who isn’t getting paid again for another two weeks. He can use the company’s on-demand pay service to at least get a partial payment of the money he has already earned. This eliminates the need for high-interest payday loans, which have financially crippled many families when they are at their most vulnerable.

During the pandemic, more companies began investigating the possibility of including on-demand pay among their compensation and benefits packages. With a historic labour shortage underway, others are ready to act, so they can use on-demand pay, which is also known as earned wage access and flexible pay, as a recruiting and retention tool.

HR Exchange Network recently conducted the On-Demand Pay Survey of more than 160 HR leaders to find out about the growth of on-demand pay. What we have learned from this research is that employees and recruits are looking for this kind of help from their employers. People are desperate to relieve financial stress and pay for unexpected expenses in a pinch. As the economy increases the number of gig workers, this kind of pay system has become normalized and expected.

However, some employers don’t feel ready to offer on-demand pay as a benefit yet. With employees in the driver’s seat, businesses could pay dearly for not providing some sort of on-demand pay. Still, payroll is a complex process with many moving parts. Larger companies, which are the ones that usually can afford to offer on-demand pay, have payroll processes that do not yet accommodate this new and innovative system.

They require lots of checks and balances to ensure compliance with laws and regulations and taking the proper amount of tax out of a pay check, for example. Making changes, such as allowing for on-demand pay, seems like a large and time-consuming undertaking. Companies are looking to overcome these challenges, but the risk averse are taking a wait-and-see approach.

The good news is that advances in technology and the fact that employees are gaining leverage because of the labour shortage are accelerating the move to on-demand pay options. This benefit is most beneficial to workers who are paid hourly, and it appeals most to retail, gig services, healthcare workers, and other verticals with high turnover rates.

By providing on-demand pay, employers are also trying to influence greater societal change. There is a tremendous class divide in the United States, and these kinds of services are a starting point for narrowing the gap. Salaried workers who often earn higher wages, also get access to better benefits and financial services. Meanwhile, hourly workers, not only earn less, but also have less access to financial services and employee benefits they need and, in many cases, may not have access to credit. Recognition of this injustice points to the fact that the timing of pay may be as important as the amount.

Why consider on-demand pay

In light of the pandemic and shaky global economy, a number of employees from a large swath of industries are looking for flexibility when it comes to pay structure. On-demand pay allows employees to access a portion of their wages as they earn them through a third-party provider rather than waiting for a lump sum. The funds are paid back from the next pay check in the cycle.

In a 2019 report from the Workforce Institute, Martin Armstrong, Vice President of Payroll Shared Services at Charter Communications said, “For some employees, not having cash on hand to pay the babysitter actually prevents them from accepting an overtime shift where they can make much more. For others, they may be a flat tire away from losing their job because they can’t pay to get it fixed. Employers have embraced the responsibility of offering physical wellness programs to employees, and as we welcome 2020 it’s time, they consider doing the same with financial wellness and on-demand pay.”

Businesses have the opportunity to be superheroes, who influence real change by using the power of their purse. Their reward could be winning the talent war. In the 2021 HR Exchange On-Demand Pay Survey, nearly 20 percent of respondents said their employees use payday loans. Another 30 percent were not sure; certainly, it’s possible that they are taking on those high-interest loans. The annual percentage rate (APR) that payday loans often approach is 400 percent, which is one reason these loans are considered a predatory product, according to Investopedia. Bloomberg points to the fact that payday loans took even more advantage of people during the pandemic.

More than 45 percent of respondents reported that employees have had a high financial stress level since the start of the pandemic in spring 2020. On-demand pay is a way to at least provide a safety net to employees. The money that they receive ahead of payday is money that they have already earned, and it could help them avoid financial fallout.

In the United States, 70 million people live pay check to pay check, according to Business Insider. Nearly 25 percent of respondents to the 2021 American Payroll Association survey “Getting Paid in America” said they either had on-demand pay as a benefit already or would be interested in having it. A majority of U.S. workers—83 percent—believe they should have access to their earned wages at the end of each workday or shift, according to Forbes, which cited a Harris poll.

On-demand pay provides a solution to these harsh realities for employees, and it can be used as a recruitment and retention tool during the historic labour shortage. Providing such a service allows a company to demonstrate its empathy for workers, who are rightfully demanding more dignity and livable work conditions.

83 percent of US workers believe they should have access to their earned wages at the end of each workday.

Employees find this benefit helpful whenever life happens. A spouse can’t work because the kids have virtual school, or an elderly family member fall ill. Let’s face it: Life is happening to everyone a lot these days. At the same time, recruiters are looking for ways to attract top talent during a time of labour shortage. People are demanding more of employers, and they simply won’t take a job that doesn’t make it worth their time and energy.

“It’s clear that Americans are in various stages of pandemic recovery and are now trying to survive the recent surge in inflation. According to the Bureau of Labour Statistics, the 2020 average American salary is $56,310. Many Americans likely struggle to afford goods and services. They may be forced to choose between food, gas, power/internet, and healthcare for their families on a weekly basis,” says Amy E. Martin, Human Resources Director of Compensation for Carilion Clinic in Roanoke, Virginia. “Perhaps the on-demand option allows them to meet one need per day based on their earnings. Given on-demand pay doesn’t increase earnings, only changes when employees have access to their funds, this could prevent expensive (no value) late fees and other charges that cost Americans millions annually.”

Providing on-demand pay ticks a few of the boxes that help boost employee satisfaction:

• People want access to the money they have already earned, especially in uncertain times.
• Many employees need access to the money, or they are forced into taking on high-interest loans that can destroy them financially.
• On-demand pay is a response to common financial problems, such as costly healthcare, living pay check to pay check, and paying off debts for education, which are commonplace for many in the workforce and the broader gig economy.

How employers can buy into on-demand pay

Employers have a different perspective than employees. Jumping into offering on-demand pay simply isn’t possible for many because of the complexity of their payroll systems and compliance. They have to take into consideration taxes, other fees, and deductions for benefits, such as medical insurance. The technology many employers use to distribute pay checks cannot yet facilitate on-demand pay, says Victoria Pelletier, Managing Director of Global CEO Transformation at Accenture.

“These are complex payment systems that connect hourly workers,” she says. “Payment infrastructure systems are advancing. It will become more common. We’re just not there yet.”

The On-Demand Pay survey verifies this perspective. About 21 percent of respondents already are offering an on-demand pay option, while about 9 percent are in the process of researching and considering this benefit. The rest are not offering or considering on-demand pay at this time.

“The challenge is an administrative one. Employee earnings are paid on demand instead of during the normal payroll cycle. However, their payroll deductions are calculated on the payroll cycle, which could be bi-weekly or monthly, etc.” says Vaso Perimenis, Head of Human Resources Strategy and Solutions at Ekstein Consulting Services. “Employers have to be very careful so that the earnings at the end of that payroll cycle can cover the deductions that include things like retirement contributions, benefit costs, company store, etc. Otherwise, deductions will go into arrears and that’s a payroll hassle for the employer and the employee.”

However, recruitment and retention are clearly top of mind. HR leaders seem to understand that this is a benefit that employees want, and it is the kind of offering that could help them during the labour shortage.

Also read: Guide to Retention and Future

Retention was the number one reason employers would consider offering such a benefit. Obviously, there is some recognition of the needs of employees.

Why would you consider flexible pay among the benefits you’re offering

What do you think would be the biggest challenges to offering on- demand pay

At the same time, employers are still uncertain about how they could deploy an alternative pay system. HR leaders who responded to the survey said there were obstacles they had to overcome.

Clearly, the biggest challenge will be getting the technology and processes updated to be able to include the on-demand pay option. Smaller and mid-size companies might have a cash flow problem that prohibits paying the on-demand pay service far enough in advance, according to the Guardian.

Pelletier stresses that companies want to provide this service because they realize how much employees and recruits like it, but that there are risks associated with it.

“Many companies pay in the rear, so there would have to be a shift in the business model, too,” she says.

Experts believe that on-demand pay will become part of the usual portfolio of benefits that employers offer. In the meantime, respondents of the On-Demand Pay Survey provided an overview of the other benefits they already offer employees.

Some also provide dental insurance, life insurance, and 401K or retirement plans. Other benefits, such as discounts for different memberships, are less likely to be on the roster in a benefits package among respondents. The results of the “Death of the Traditional Pay Check” survey, which was conducted by The Harris Poll on behalf of The Workforce Institute at Kronos in 2019 showed that 3 in 4 employees want access to their pay check before payday, and more than half of them believed on-demand pay was a more attractive benefit than additional paid time off. Obviously, there is proof that this could be a tool for recruitment and retention.

What benefits do you offer full-time employees

Employee benefits	Percentage of companies
Sick leave	84 percent
Paid vacation	80 percent
Medical insurance	76 percent
Life insurance	61 percent
Dental insurance	54 percent
401k or other retirement plan	48 percent
Flex time	44 percent
Other	20 percent

 

 

 

 

 

 

 

Also read: Employee Benefits Trends

On-demand pay case studies

Uber provides its workforce the opportunity for instant payments. Workers can load money they just earned onto a debit card up to five times per day. Most U.S. drivers and delivery people can get this immediate pay after completing their first trip for the company.

Walmart associates can use a service that allows them to get partial payments from their pay check once per week. At different times, they can cash out different amounts of money. Fifty percent of all of their accrued net earnings, minus deductions, are available regardless of when they request it. Some workers will not be able to access this service because it is unavailable where they live.

For a fee of $1.99, Door Dash delivery people in the United States can cash out their earnings daily rather than waiting for a weekly deposit. Workers become eligible to buy into the service after they have made 25 deliveries and have been on the company platform for at least two weeks.

Lyft’s option is less efficient than some of the others. Workers might have to wait to start cashing out because of the time it takes for their bank to make deposits. Earnings can appear within hours or days. Still, workers don’t have to wait until payday.

On-demand pay is the future of pay structures

At the same time, the majority of HR leaders, who responded to the HR Exchange Network’s On-Demand Pay Survey say that compensation is the biggest factor in recruitment and retention strategy. Obviously, this is meaningful and could indicate that more employers will consider flexible, alternative pay structures in their quest to attract top talent. After all, 40 percent of respondents said they are unable to recruit talent in the way they could before the pandemic. The overwhelming majority of respondents – 145 out of 162 to be precise – experienced a turnover rate of between 0 percent and 50 percent in the last 18 months.

Salaries were the most common form of payment that respondents offered to employees. But hourly and freelance/ contract/gig workers were represented, too. Most of them, at 43 percent, pay at least some of their workers on a monthly basis. Compensation experts suggest imagining if you had to wait one full month to get paid when an emergency has arisen in your family. Many are reminding employers that timing of pay can sometimes be equally important to the amount.

What type of payments are made to your employees?                                                   

Hourly wages – 49 percent

Salary – 93 percent

Freelance/Contract/Gig worker – 33 percent

Often, employees have to wait even longer for some of their pay. More than 60 percent of respondents offered employees a performance-based bonus, about 36 percent gave an end-of-year gift, and about 25 percent provided profit share. About 15 percent of respondents offered no bonus, and about 16 percent offered other kinds of incentives. Employees are increasingly taking the view that waiting for additional money, when you might not be able to afford necessities, is not sustainable. As a result, Millennials and Gen Z workers are demanding changes to payroll.

What bonuses are provided to your employees?

• End-of-the-year holiday gifts - 36%
• Performance-based bonuses - 61%
• Profit Share - 25%
• None - 15%
• Other - 16%

“As previous Workforce Institute at Kronos research shows, younger employees want the flexibility of gig work but the stability of a traditional full-time job – and the same can now be said for how they want to be paid,” has said Bob Clements, President of Axsium, according to The Workforce Institute at Kronos.

“Organizations that embrace an on-demand pay model will be one step closer to offering an engaging, future-ready workplace experience that will lure the top talent and position them for success for years to come.”

Bob Clements

President of Axsium

Clearly, with more job candidates and employees seeking ever-increasing amounts of flexibility, the pay structures that have traditionally defined the way we work are on the way out. Employees really want to have access to the money they have already earned.

“On-demand pay puts more control in the hands of employees. There are those who live pay check to pay check, and emergencies come up,” says Pelletier. “From that standpoint, it’s a safety net.”

Companies that want to win the talent war and pay hourly for gig workers can facilitate the freedom and convenience candidates want in a compensation package. They may have to overcome some challenges and mitigate risk to provide on-demand pay. In the near future, experts expect advances in technology and shifting cultural norms to push employers into providing on-demand pay among their usual benefits packages.

Also read: Hiring in the labor shortage era