As we enter into a new decade, one of the most progressive and popular employee benefits among employers has been on-demand pay (also known as earned wage access). This type of pay system involves granting access to earned wages before an allotted pay cycle has been completed. On-demand pay services are often provided by a third-party to offer employees a level of financial stability when faced with financial hardship or an unexpected expense. As the economy continues to evolve, employers are utilizing on-demand pay as a recruiting and retention tool to attract and maintain top talent during a historic labor shortage.

This paper is designed to discuss the background, benefits, and potential challenges associated with on-demand pay for both employers and employees. It will provide insight into the mindset of younger generations of workers and their demands for alternate pay as flexible and convenient compensation packages. Through an examination of recent research, this paper will provide a comprehensive guide to on-demand pay, and how it can improve recruitment, retention, and employee satisfaction.

Background

On-demand pay is a relatively new form of compensation, but it is quickly gaining traction as the labour market shifts towards gig-based jobs. The concept of on-demand pay emerged in 2015 when companies, such as Uber, began offering access to earned wages in real time. This assistance came in the form of an Uber debit card, which drivers could use to access their earnings before the allotted pay period had been completed.

In light of the pandemic, more companies began to investigate the use of on-demand pay as a way to help employees in need of financial assistance. A study conducted by the Workforce Institute at Kronos revealed that 83% of workers believed they should have access to earned wages in real-time. Other reports indicate that four in 10 American adults (or 42%) are unable to cover an unexpected expense of $400 or make it quite difficult for them to do  so. An on-demand pay system can help to reduce this financial burden by providing access to wages that should already have been earned.

Research conducted by HR Exchange Network’s 2019 On-Demand Pay Survey found that over 80% of HR leaders believe that on-demand pay was worth the investment. Although many companies consider implementing an on-demand pay system, they are met with a number of obstacles. These include administrative challenges associated with integrating an alternate payroll system and risks associated with deviation from laws and regulations.

Benefits

The benefits associated with on-demand pay reach far beyond those in need of emergency cash flow. Recent research indicates that on-demand pay has the potential to improve recruitment and retention in the highly competitive labor market.

Recruitment

As the economy enters into a job market shortage, employers are looking for ways to stay ahead of the competition when it comes to recruiting top talent. On-demand pay can be an invaluable asset in doing so, as it signals to potential employees that the company understands the demands of a younger generation of workers. The idea of ‘payment timing that’s as important as the amount’ is becoming increasingly popular with those aged between 18 and 29 – which accounts for much of the ‘gig economy’ workforce.

With an on-demand pay system, employers show potential recruits that they care about their financial stability and well-being. This is especially beneficial for workers who are in situations where one missed payment could be catastrophic, such as childcare workers or those facing extreme medical costs.

Retention

In addition to improving recruitment efforts, on-demand pay can also be used as a tool for employee retention. With the current labor shortage, it is more important than ever to keep hold of your top talent and reward their efforts. Studies show that employers who offer wage access tend to retain their best employees for longer than those who do not.

Furthermore, access to on-demand pay has been proven to reduce turnover. This is especially beneficial in industries with a high turnover rate, such as retail or gig services where employees are more likely to leave if they are not being adequately compensated – either financially or emotionally.

Employee Satisfaction

Access to earned wages in real-time has been shown to improve the overall satisfaction of employees. Experts suggest that on-demand pay releases employee anxiety, allowing them to focus on their job and perform at their absolute best. Furthermore, on-demand pay provides employees with peace of mind that they have the security to handle any situation if a financial emergency were to arise.

Finally, on-demand pay shows employees that their employer is invested in their wellbeing and takes into consideration the demands of a new generation. This is invaluable in terms of motivating employees to remain loyal and perform to the best of their ability.

Potential Challenges

While on-demand pay offers myriad benefits, there are a number of challenges and potential risks associated with implementing an alternate pay system. Companies must be aware of the legislative and regulatory frameworks they must operate within, as well as the complexities of integrating a new system into existing payroll models.

Legislation and Regulation

One of the biggest challenges faced by employers is ensuring compliance with all relevant laws and regulations. Payroll is a complex process with many moving parts and implementing on-demand pay could require extensive changes and restructure. This is especially true for larger companies, which require more complex payroll processes.

Furthermore, companies must be aware of their responsibilities to the employee and the level of payroll taxes which must be withheld from wages. If these calculations are not correct or enforced, employers can be faced with hefty fines from regulatory bodies.

Integrating a New System

The implementation of an on-demand pay system represents a significant technical challenge for employers. This is especially true for larger companies, which require a significant overhaul of existing payroll processes. The IT systems and APIs which enable these processes must be both secure and sophisticated to ensure efficiency and accuracy.

Security risks are also a major concern, with companies having to meet data privacy standards in order to protect both the company and the employee. All of these considerations come at a time when employees are more keen than ever to have access to their earned wages as quickly and securely as possible.

Conclusion

On-demand pay represents a shift in the way employers offer compensation to their employees. It is becoming increasingly popular as a means of improving recruitment and retention in a time of historic labor shortage. It also shows employees that the company values their financial stability, thereby increasing overall job satisfaction.

However, employers must consider the challenges and potential risks associated with implementing an on-demand pay system. Legislative and regulatory frameworks must be adhered to, and existing IT systems must be carefully integrated to ensure efficiency and security for both the company and its employees.

With the right approach, on-demand pay can be instrumental in improving recruitment and retention efforts. Furthermore, it can provide employees with the security and financial freedom to pursue their career goals with confidence and peace of mind.