Fast-pay options are a growing trend in payroll as employers promote the service as a way to reduce turnover and boost morale while offering a benefit to employees that enables access to earned wages in a day, if not within minutes.
The technological phenomenon that is expedited pay appears to be quietly gaining popularity, although the mechanisms employed are suited to a variety of industries and require different levels of payroll involvement.
Even large payroll service providers, such as ADP LLC, are participating in this emerging trend. ADP recently announced that its clients would have access to DailyPay, a provider of a mobile application that allows access to wages before the regularly scheduled payday. ADP, a payroll- and human-resources services company, offers DailyPay access through ADP Marketplace, an online source for workplace services and software. ADP Marketplace also offers clients access to workplace services from PayActiv, which allows limited access to earned but unpaid wages before payday.
“An increasing number of employers tell us that workers ask for the ability to access their pay with greater flexibility and in a responsible way,” Craig Cohen, general manager of ADP Marketplace, said in a statement announcing the agreement. “DailyPay enables our customers to offer instant payments to their employees so that they can avoid late fees or payday loans.”
Jason Lee, chief executive officer of DailyPay, said: “ADP customers require an offering that is compliant in all 50 states. They require an offering that allows employees to receive instant payments to any bank account, payroll card, or prepaid card. We are excited to partner with ADP on the future of payroll.”
A Range of Options
The spectrum of same-day and next-day payroll offerings is bound on one side by technology provided as an employer benefit to employees that incorporates payroll functions on amounts earned and made available before a company’s regular payday. At the other extreme is stand-alone technology that allows employees, with minimal employer and payroll involvement, to access advances and short-term loans on wage payments. However, a host of products exists between these parameters.
Beyond DailyPay, the universe of expedited-pay companies ranges from Gusto, which offers employers a product that performs various payroll functions on the earned wages that are advanced to workers, to companies such as Earnin, which offers workers a downloadable app to access earned wages with minimal employer involvement.
Walmart has an expedited pay program for employees, and SurePayroll, a Paychex company, has a monthly subscription program that allows small employers to provide expedited pay.
A recent survey by Paychex Inc., a management-services provider for payroll, showed that offering daily pay options to employees was among the top five employer priorities for 2019, favored by 10 percent of respondents. “In today’s digital world, with the ability to buy goods and services with a simple tap on a mobile device, employees value--and increasingly expect--fast and easy access to payroll funds,” Martin Mucci, Paychex president and CEO, said Sept. 5 in releasing the results of the survey.
The need for such immediacy often is characteristic of workers in their 20s and 30s, many of whom use on-demand applications for ride sharing, food deliveries, and furniture assembly. “They can’t reconcile why it is that if I can get my car instantly, I have to wait for two-week batch payroll,“ Lee told Bloomberg Tax in an interview in November.
The model developed by DailyPay, a private New York financial technology company that was founded in 2015, encompasses five characteristics: employee application, conversion of employee hours to an available balance, funding the payment, remitting an instant payment, and repaying the vendor. With DailyPay’s technology, no change to employer payroll systems is needed, including payroll liabilities, tax withholding, and reporting requirements, Lee said. The transaction is not a loan because the mobile application transfers net income that has been earned, he said, adding that taxes are figured into the payment calculation.
Employees, after filling out an employer-provided form to direct wage deposits and downloading the DailyPay mobile app, accumulate an available balance within a pay period, Lee said. Payments may be made to a bank account, prepaid debit card, or payroll card. DailyPay has a partnership with Visa and Mastercard networks for instant transfers and the ACH network for transfers the next business day. Funds are deposited almost instantly in an employee’s bank account, he said. Additionally, employers may limit the percentage of earned wages that employees may access, but otherwise the payroll process is unchanged.
An employee’s pay stub reflects the full amount of wages earned in a pay period, regardless of the transactions an employee has with DailyPay, Lee said. The employer-issued pay stub provides a record that the full amount of wages were sent to the employee’s account of record, he said. “That’s how you know you got all your pay,” he said.
Some expedited-pay companies may offer employees access to up to 50 percent of earned wages to ensure that enough funds remain in a bank account to allow the payment, Lee said. DailyPay, by comparison, is able to fully fund the wage payment because it has balance-sheet capabilities to make the payments to employees, he said.
DailyPay fees range from $1.25, when requesting funds that be paid the next business day, to $2.99, for instant access to earned wages. The fee may be paid by the employer, employee, or a combination of both options. After providing funds to the employee, DailyPay is repaid through the payroll process, Lee said.
Payroll principles essentially have not changed in the past 200 years, Lee said. Payroll professionals are “focused on making sure they are compliant with wage-deduction laws,” he said.
Regarding overtime wages, Lee said that aspect may be looked at as a product or practical matter, depending on how the employer wants to make the funds available.
“As a product matter, we can make any amount available that the employer has told us that the employee has made, so long as the employer is communicating that to us,” Lee said. “As a practical matter, most companies just do the base rate—'We’ll deal with overtime later and we’ll just pay it out on the payday.’”
For example, a DailyPay employer deals with overtime by logging the hours directly into the time-management system, Lee said. “That shows up in our data feed, so we make that available,” he said. In general, most employers deal with overtime payments on a one-off basis, he said.
DailyPay, which lists Adecco, Vera Bradley, Westgate Resorts, Taco Bell, KFC, and Pizza Hut among its clients, notes that “there has been significant interest from service industry verticals employing hourly laborers,” such as health-care services, retail, hospitality and entertainment, customer service, professional services, and quick-service restaurants.
A South Carolina restaurant chain, Lizard’s Thicket, signed up for DailyPay’s service in March 2018, offering it as a benefit for employees. The company, with headquarters in Columbia, S.C., has about 650 full-time equivalent employees, said William Johnson, payroll and benefits manager. The company had a number of employees who would request payday advances, which was an administrative burden for its in-house biweekly-pay system, he said.
“The benefit is more for the employees than us,” Johnson said, adding that same-day pay is the most-used benefit at the Southern-style restaurant company, although tipped workers do not participate. Since making DailyPay available to employees, turnover has decreased slightly, he said.
The restaurant company considered other fast-pay options, but DailyPay’s service seemed the most simple to operate, said Johnson, who received training on how to use the process. DailyPay provides customer support to employees, who also receive a special ID number to verify their identity. The only time DailyPay contacts Johnson is when it is unable to verify an employee’s ID number.
Stephanie Salavejus, vice president and chief operating officer with PenSoft, said many of her clients are skeptical about the benefits of expedited-pay programs.
For tax purposes, Salavejus said: “When items like this come down, we get inquiries from our clients. We do have an underlying concern. How is this not constructive receipt? Why would I not be required to make deposit the same day?”
Other concerns for payroll involve mandatory deductions, such as garnishments, liens, withholding for child-support payments, and lock-in letters from the Internal Revenue Service, Salavejus said.
“The responsibility of such deductions belongs to DailyPay, not the employer,” Lee said.
“Through DailyPay’s proprietary technology, we make 100 percent of the employee’s final net pay available for early access,” Lee told Bloomberg Tax. “Our algorithm takes into account all deductions, including standard deductions--taxes, insurance, etc.--as well as unique deductions such as garnishments, back taxes, etc.”
The IRS, in response to a Bloomberg Tax query about same-day pay applications and mandatory deductions, said: “We have not issued any guidance on this issue.”
In terms of employee financial responsibility, Salavejus said the DailyPay model and similar programs may do little to encourage such accountability.
“There is concern of the employees having to pay almost $2.99 to access their funds the same day or $1.25 for next day,” Salavejus said. “I agree the percentage could be less than a late charge or interest rate for late payment, but it is an expense either to the employee or employer. Employers looking to offer the option as a working benefit would have to balance the cost with level of employee satisfaction.”
On the contrary, Lee said DailyPay promotes financial responsibility.
“The structuring of the daily pay benefit is crucial to promoting financial responsibility,” Lee said. “First, we offer a needs-based benefit. Just like an ATM machine, DailyPay is available when you need it.”
For each day that is logged by the employee, the earned-wage balance increases, reflecting the accumulating amount of earned and unpaid wages for the pay period, Lee said.
“If an employee happens to face an unexpected expense in the middle of the pay period, they have the full flexibility to access any portion of the accumulated earned-unpaid wages,” Lee said. “Paying a bill and not incurring a $30 late fee is the best way to create more savings for an employee. Our data shows that 94 percent of users utilize DailyPay to pay bills. In addition, only 9 percent of users request over 50 percent of their net pay, and 100 percent of users receive some amount of their pay on payday.”
Payroll-Service Add-On Slow to Gather Steam
Gusto, which provides payroll and other services to small businesses, offers Flexible Pay, a no-fee, no-interest loan made to employers to advance workers earned wages as soon as the next day. The payment is less normally scheduled tax deductions, health insurance premiums, or Section 401(k) contributions, the company said in response to questions submitted by Bloomberg Tax.
Gusto’s aim “is for every employee to have the opportunity to choose their payday and get paid whenever they want, whether that’s with Flexible Pay or a similar feature,” Rick Chen, the company’s communications officer, told Bloomberg Tax in an email. “Because our flagship product is full-service payroll, we are uniquely positioned to be a part of the future of work,” he said.
Gusto calculates, pays, and files all relevant federal, state, and local payroll taxes for employer clients as part of its payroll service, the company said, noting that employer clients may elect to also offer Flexible Pay, which the company launched on June 21, 2018, “because it believes the biweekly or monthly pay period is antiquated.”
Once employers elect to offer Flexible Pay, eligible employees may opt in to request a Flexible Pay payment. Gusto advances the wages, which are deducted from the employer’s next payroll, without affecting the employer’s existing pay schedule, the company said.
Flexible Pay does not support overtime and paid time off hours, and nonexempt employees can only be advanced their standard work hours, the company said.
Gusto supports weekly, biweekly, semimonthly, and monthly pay schedules, and allows employers to run unlimited off-cycle payrolls, “even multiple times per day,” Chen said.
“Employees receive their paystub on their employer’s designated or ‘regular’ payday,” Chen said, noting that the paystub includes typical employee and employer information, such as the dates of the pay period; employee pay rate, gross earnings, employee contributions and deductions, health insurance premiums or charitable contributions, taxes withheld, and net pay. “Employees also see a deduction for any Flexible Pay wage advances received in that pay period,” he said.
More significantly, Flexible Pay is only available in Texas, where it is used by small businesses that range from a Fort Worth moving company that only employs veterans to a Houston pilates studio, Chen said. Gusto plans to soon expand Flexible Pay outside Texas, he said.
SurePayroll, while not as geographically limited as Flexible Pay, typically serves customers having fewer than 10 employees, including officer-only and sole-proprietor companies that are looking to outsource the complexity of payroll calculations and processing, the company said in response to questions from Bloomberg Tax.
SurePayroll charges client companies a monthly subscription fee that starts at $29.99 and a $4 per employee fee for core payroll services to which same-day payroll may be added for $99 plus $5 per employee or to which next-day payroll may be added for $69, inclusive of one employee, plus $5 per additional employee, Caitlin Carragee, a marketing manager at the company, said in an email.
SurePayroll’s services include tax-payment calculations and filings on behalf of its client companies. For SurePayroll users, the company calculates and files tax payments based on the wage data entered by the employer for all payrolls, Carragee said.
Expedited Pay as Employee Perk Trending?
Walmart announced in 2017 that it would allow 1.4 million Walmart and Sam’s Club workers nationwide to access earned wages ahead of scheduled paychecks as part of a package of financial-wellness tools intended to help its workers achieve greater flexibility and avoid overdraft charges.
Walmart’s financial-management tools and Instapay app were the result of a collaboration with Silicon Valley-based financial technology startups Even and PayActiv, the company said.
Walmart workers could access the Instapay technology up to eight times a year for free, the company said in its 2017 announcement. If workers needed more frequent access, the company would subsidize the monthly subscription needed to do so, it said. The monthly membership fees include any costs associated with the faster payout option without per-transaction on faster-transaction fees, it said.
The app connects to a worker’s checking account, prepaid account, or Walmart Associate paycard, and links to Walmart’s payroll systems, the company said, noting that the app “automatically subtracts anticipated expenses from a user’s anticipated cash inflows, allowing associates to see exactly how much money they’re okay to spend.”
Instapay users can access up to 50 percent of their net earnings in a pay cycle, and the payment appears on the next paystub as a payroll deduction, Even said in response to questions submitted by Bloomberg Tax.
Even is not a payroll provider, so it does not interact directly with processes related to the handling of taxes, overtime, and so forth, the company said, noting that “where necessary employers share their internal calculations of these data points to inform the amount of net pay that is available for access via Instapay.”
Similarly, FlexWage offers an On Demand Pay product designed as an employer-sponsored financial-wellness benefit program that works with employer human resources and payroll systems to provide employees with managed access to accrued wages within a pay cycle, according to the company’s website. In so doing, workers do not need to rely on expensive financial products, avoid further debt, and gain economic security, it said, noting that Demand Pay is not a loan, and that there is no interest or payback period.
Essentially, employers deposit earned, unpaid wages into an account that is associated with a reloadable, linked Visa or MasterCard debit card. The amounts accessed by the employee are deducted from the employer’s associated payroll, according to the company’s website. The employer controls the frequency with which employees may make early withdrawals and how much may be withdrawn. A flat $3 to $5 fee applies for early transfers, according to the company’s website.
Gig Economy Embraces Cash-Advance Apps
Gig workers and hourly workers, particularly those in the service industry, often need only a smart device and a checking account to benefit from technology that helps them to quickly receive pay.
Generally, these workers need only download an application and synchronize it with information about their employer, time sheet, pay cycle, and their checking account.
One expedited-pay app, Earnin, requires that users have a checking account and a job that provides wage payment through direct deposit. Employees verify their employment and pay cycle. Workers can access earned wages calculated based on hours worked, up to a daily maximum of $100 with the opportunity to eventually access up to $500 of their wages per pay period, the company said.
Earnin claims that workers at more than 50,000 companies in 50 states download its app. No fees apply, the company said. “Our community pays what they think is fair through voluntary tipping,” it said.
For payroll purposes, employee pay now is being made available in advance of normal paydays through this variety of channels. However, none of these providers of services for employees so far offer a daily pay cycle that replaces the normal, scheduled payday.
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