Workers Have Multiple Options for Receiving Early Earned Pay

The gig economy, direct-to-consumer payments, and earned wage access are some ways that workers are accessing their earned pay in advance of their regularly scheduled payday, a payments expert said May 14.

The gig economy and direct-to-consumer payments do not affect employers payroll processes, said Keith Melton, senior vice president for The Clearing House.

Companies within the gig economy, such as Uber, Doordash, and Grubhub, offer same-day payment for services provided by their independent contractor workers, Melton explained. Direct-to-consumer payments, on the other hand, are provided by financial institutions to their customers, he said.

"[Direct-to-consumer payments] would be a loan that the banks are making to their retail customers and it would look and feel a lot like [earned wage access], but it is not an employer-integrated model,” Melton said at PayrollOrg’s 43rd Congress in Kissimmee, Florida. “They are doing it based on what they know about their customer, the risk profile of their customer, the direct deposit cycles that they see on a regular basis, and they have to do a Truth in Lending disclosure.”

In contrast, earned wage access can affect payroll processes, Melton said. Unlike direct-to-consumer payments, earned wage access payments are not considered a loan, since the payment consists of a portion of an employee’s earned wages that have yet to be paid.

There are two typical models of earned wage access, Melton said. One method requires an employer to reimburse an earned wage access provider for funds representing earned wages that are paid to an employee. The other method involves the employer sending the provider a payroll file, which the provider uses to pay the funds to the employee.

Earned wage access comes with some concerns for payroll, especially regarding withholding, Melton said. Many earned wage access providers limit the amount of earned pay that can be received, with the typical limit being 50% of wages. The limit lets employers keep enough of an employee’s earned pay to withhold items like taxes, child support, or garnishments.

Earned wage access can benefit employees, even though it can throw a wrench in payroll operations, Melton said. It can prevent overdraft fees and discourage employees from taking out payday loans to cover their expenses, he said.

“There’s a lot of benefit to an employee from a financial wellness perspective,” he said. “I also think there’s a lot of benefit to an employer. A lot of the recent studies have shown that there is an almost 42% increase in retention of employees who have [earned wage access] available to them.”

Additionally, earned wage access generally has no direct cost for employers, Melton said. Providers of earned wage access usually charge a small transaction fee to employees using the service.