Employees have bills and expenses that sometimes align with their company-set payday. On-demand pay helps employees manage these unavoidable expenses, reduces stress, and increases financial stability.
A new generation of payroll apps allows employees to access their earned wages before the usual pay period for a fee. It is also known as daily pay or earned wage access.
Payday Loans
For many employees, each workday feels like a mini-paycheck. The two-week pay period blurs together, and each day’s bank account transfer gives a dopamine hit of financial reward, just like the likes they get on social media.
However, it takes time for workers to consider how much does daily pay take out your paycheck to maintain your savings when bills and crises arise in between paychecks. And when they run out of money, they are only left with a few options that are rarely safe and may be very expensive.
Workers have historically used payday loans to bridge the gap between paychecks, but these expensive, short-term loans can trap borrowers in a never-ending cycle of debt. But today, new apps and services offer a safer, cheaper alternative to payday loans, allowing workers to save for emergencies and avoid expensive bank overdraft fees.
Companies can now provide employees with early access to their earned wages ahead of traditional payday using on-demand payroll technology. It is called “daily pay” or “earned wage access.” Unlike a paycheck advance, daily pay does not require a credit check and does not charge any interest. It is a simple way to give employees more control over their finances without adding strain on the employer or burdening the regulated banking industry. And it helps to improve employee morale, reducing turnover and improving productivity.
Checking Accounts
As the name implies, a checking account lets you deposit checks and withdraw cash from an ATM. It’s also a good place to move money around, so you can pay bills, send funds and transfer money to others. According to the Federal Reserve, eight in 10 adults have a checking account.
While banks and credit unions offer various checking accounts, only some are equal. The best checking accounts are easy to use, offer a great interest rate and make managing your finances more efficient.
Some employers offer daily payroll, which gives workers access to wages they’ve already earned in exchange for a fee. It can reduce the anxiety of waiting for compensation and increase productivity and employee happiness. Additionally, it can assist businesses in luring in and keeping on workers who might need to put in more time or cover more shifts.
However, instant pay has its challenges. One of the most significant is that debiting as a form of employee payback implicates the extension of credit and violates laws in many states. It is why the CFPB’s December 30, 2020, follow-up order to its November 30, 2020, EWA advisory opinion explicitly excluded debiting from the safe harbor.
Savings Accounts
With daily pay, employees get access to their earned wages on the day they work. It’s a benefit popularized in the gig economy, where restaurant workers, delivery companies, and ride-share services are paid per-transaction rather than at the end of a set shift.
But it also helps traditional full-time employees with bill due dates between paydays. It’s the perfect way to avoid overdraft fees and late payments that can cause a domino effect on financial health.
Savings accounts are also a great place to move any funds you receive from tax refunds or inheritances. Many people struggle with the temptation to spend any extra money they receive, so putting some away for emergencies and long-term goals is important.
With daily pay, you can easily set up automatic savings transfers to your savings vault to save for things you want in the future. If you need to use those funds, you can return them to your daily pay balance for immediate transfers for free. Remember that auto-saved funds may be automatically reserved for your next paycheck, depending on when you turn off the feature. But you can always choose to turn off the feature at any time. It will empty your savings vault and remove any funds scheduled to be sent in the next pay period, but it will not affect your upcoming paycheck.
Taxes
Accessing earnings on demand can help employees pay bills on time, avoid overdrafts and late fees and save money. However, most daily pay services charge a fee to withdraw funds early, which can add up quickly. Some of these fees have been compared to payday loan rates and have prompted regulatory scrutiny.
Providing employees access to earned wages on-demand reduces their stress and increases their productivity and job satisfaction. Research by the Financial Health Network shows that workers under financial stress are twice as likely to use sick days and are less productive. On-demand pay also helps employees plan and can reduce the stress of unexpected expenses, such as a sudden car repair or unplanned home maintenance.
Companies that offer daily pay see a reduction in employee turnover and many of these services are easy to implement. Employees can transfer their earned balance to a bank account or other payment methods, and there is no set-up fee for the employer or employee. The technology behind these services connects to the company’s payroll system and receives automated reports of hours worked. As the week progresses, an employee’s available balance grows as they work and can be transferred any time before payday. Employees can also use in-app financial wellness tools and other features to help them reach their goals.
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