Conference Report: On-Demand Pay Programs May Find Niche in Virus Crisis

April 23, 2020, 4:38 PM

On-demand pay, a growing payroll trend that allows early access to earned wages, may find increased use by workers who need quick access to cash to buy masks, hand sanitizers, special gear, and supplies during the coronavirus crisis.

With many employees facing layoffs and reduced work hours, those who remain in the workforce may favor quick-pay options, said Matthew E. Kopko, vice president of public policy at Daily Pay Inc. in New York, which provides a smart-phone application that allows access to wages before regularly scheduled paydays.

Even before the virus crisis, many cash-strapped workers found it difficult to cover expenses between paychecks, Kopko said April 22 at the American Payroll Association’s online Capital Summit.

Traditional, Gig Workers Access Applications

Those typically accessing wages through a mobile application include workers at restaurants, hospitals, and supermarkets, Kopko said, adding that early availability of wages may allow them to do their jobs during the pandemic.

Gig workers, in particular, have become essential during the virus crisis because they are delivering food orders and groceries to those who can’t or do not want to leave their homes to pick up food or grocery shop.

For example, the use of the DailyPay application increased 400% from March 14 to March 17, when many states and cities started to require that workers stay home, Kopko said.

On-demand pay programs are somewhat influenced by gig economy employers or platforms, such as Uber and Lyft, but the programs also are offered through traditional employers, including programs for part-time and full-time employees, said Lauren Saunders, associate director of the nonprofit National Consumer Law Center in Boston.

Program Variations

Although there are many variations to wage-access programs, Saunders puts them into two broad buckets:

• Faux wage-access programs, which are offered directly to the consumer without any connection to the employer’s wage and attendance products. These programs may have methods of estimating wages that are earned, such as looking at copies of time sheets and tracking how much time someone spends in the workplace, but they are not directly accessing an employer’s records.

• Programs offered through the employer that include in-house options, which may include daily payroll processing, wage payments offered on nontraditional pay cycles, or loans and advances repaid through payroll deductions, Saunders said.

Same-day and next-day access through third-party providers offers a payroll duality: At one extreme is the technology that is provided as an employer benefit to employees that incorporates payroll functions for wages earned and made available before the regular payday.

At the other extreme is technology that allows employees to access advances and short-term loans on wage payments. In between the two extremes are a number of instant-pay products as well as policy issues.

Donna Gettings, vice president at Quality Adams Keegan Inc. in Memphis, Tenn., a human resources management company, said on-demand pay programs can offer employers a way to recruit and retain employees, improve attendance, and bolster competitive benefits packages. The downside of such programs is a lack of federal and state regulatory guidance, an increased administrative burden for employers, and overuse by employees, she said.


For employees, the programs can boost morale, increase financial wellness, and serve as an alternative to payday loans, which generally have high interest rates.

“Early wage access gives those employees a better option than payday loans,” Gettings said.

On-demand pay programs tend to raise more questions than answers, especially because there is a lack of federal or state regulations, Gettings said. The issue of constructive receipt of wages with regard to income taxes is a big concern, she said. If the advance is considered a loan, federal and state lending laws may apply, she said.

Employers seeking to establish a quick-pay program must decide on an in-house system or contract with a third-party vendor.

An in-house program could involve the regular payroll process or loans and advances through payroll deductions.

The use of an external vendor offers a variety of programs with varied employer involvement. Employers should consider:

• options and ease-of-use for computer software and smart-phone applications;

• employees enrollment, authorization, and the storage of legal documents;

• payment options, such as Automated Clearing House payment processing to a financial institution or payroll card, and payment platforms such as PayPal and Venmo; and

• privacy and security.

Employers should meet with vendors to review wage-payment products and ensure corporate goals are met, Gettings said. “Review these through the eyes of employees, or they’ll keep calling payroll with questions,” she said. The employer’s information technology department should be included in the decision-making process, she said.

A key point involves personal data. With an outside vendor, the sharing of documents is required, especially earnings statements and Social Security numbers.

Compliance Issues

Compliance of state data-protection laws is necessary, Gettings said. Employers must determine how long records can be retained and have verification provided when data is destroyed, she said.

The employer’s legal department should review the contract, with particular attention paid to automatic renewals, exclusivity clauses, and whether changing a vendor affects the terms of the agreement, Gettings said.

Early access pay programs should be used occasionally by employees rather than every pay cycle, said the National Law Center’s Saunders. “But the way these programs are designed, they can lead to chronic use,” she said.

In setting up an on-demand pay program, employers should consider offering employees a free program or one with a nominal monthly charge, perhaps $5, Saunders said. If the employer chooses a third-party vendor to run the program, the service should access actual payroll records and not debit employee bank accounts, she said.

Additionally, employers should limit the number of wage advances, Saunders said. A maximum of six advances should be allowed a year, with no more than three consecutive payments, she said.

“There should be a step-down in payment size--$120, $80, $40, and then a cooling-off period,” Saunders said, adding that a goal would be to wean people off the programs so they do not add to their monthly costs through repeated access fees.

While same-day wage-payment programs are not ideal, Saunders said they are arguably better than payday loans.

“Payday loans leave a hole in the paycheck,” Saunders said. “Early-access programs just fill the hole.”

The coronavirus crisis, too, has shown limits to the such program, because the pandemic will not be over in one pay period.

“People just need money,” Saunders said. “Borrowing from the next paycheck may not be the solution.”

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com

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