In recent years, the development of the gig economy has raised legal questions for employers, workers, legislators, and government regulators. The traditional legal definition of the employer-employee relationship is one area where legislators and government agencies are working to provide greater clarity for employers, employees, and independent contractors concerning their legal rights and responsibilities.
Similarly, technological advances and an increase in the number of workers in the gig economy have fueled interest in faster payment methods like on-demand pay. With on-demand pay, workers are able to access their pay when they want, rather than according to a scheduled determined by the employer. This interest has spread beyond those involved in the gig economy to employers and employees in "traditional" businesses, allowing employees to gain access to wages earned before payday. However, the concept of on-demand pay raises many questions for employers, including when the actual date of payment occurs for employment tax withholding, depositing, and reporting purposes.
Payroll service providers have started offering on-demand payroll services to their clients. In addition, there are separate providers that offer a platform that integrates with an employer's payroll system to provide on-demand pay. Because these are relatively new services and laws on the federal and state levels may change, employers should consult with their legal department before implementing an on-demand pay program.
While different types of on-demand pay programs have been developed, all programs rely on payroll data, such as hours worked and rates of pay. Employers considering whether to adopt a program should carefully consider the additional resources required to manage an in-house program and/or the technical specifications and the data elements they would need to give to a third-party provider.
Types of Programs
The types of on-demand pay programs include:
- In-house programs. Employers offer on-demand pay through internal management. The employer fully funds the payment and has complete discretion over the amount and frequency of employee paychecks.
- The check date changes. Employees may access earned-but-not-yet-paid wages before the regularly scheduled payday effectively creating a new pay date. The employer bases all tax deposits based on the date the employee accepts payment. This method poses unresolved questions regarding statutory exemptions from wage garnishment, which are generally based on a pay period lasting a full week (168 hours).
- The check date does not change. Employees may access earned-but-not-yet-paid wages before the regularly scheduled payday. On the regularly scheduled payday, the employee's pay statement should note a deduction for the early accessed wages. Wage garnishments and tax deposits are made as though the full wages are paid on the regularly scheduled payday. This method could pose tax compliance issues, since early access appears to trigger constructive payment, which in turn would require the employer to base its tax deposit on the date the employee receives the funds rather than on the date of the regularly scheduled payday.
- Third-party vendor programs. Employers or employees select a third party to provide on-demand pay services. Generally, third-party vendor programs fall into two general categories:
- Plans are funded by the employer and managed by the vendor. The employer has some discretion over plan design and the frequency of pay. The employee's net pay is reduced by the on-demand pay amount on payday similar to employer-offered (in-house) plans.
- Third-party vendors manage the service, including funding the on-demand payments. These vendors provide the service directly to employees and require the employee to repay the amount to the vendor on payday. The employer may have little involvement with these programs.
- IRS Gig Economy Tax Center
- Internal Revenue Service Advisory Council (IRSAC), 2019 Public Report. IRSAC recommends that the IRS provide guidance concerning on-demand pay and identifies 18 issues for the IRS to consider as guidance is developed (11-2019, see pages 82-85).
- U.S. Department of Labor, Wage and Hour Division, Opinion Letter FLSA2019-6: Provides guidance on when a service provider for a virtual marketplace company (e.g., Uber, Lyft) is an employee under the FLSA or an independent contractor (4-29-19).
- Inside Washington, September 2019, "APA's Government Relations Task Force Engages States on Issues": APA commented on California S.B. 472, regarding early wage access in California.
- APA News, New York Leads Multistate Investigation of Payroll Advance Industry (8-29-19)
- Inside Washington, July 2019, "APA Offers Recommendations on IRS Priority Guidance Plan": In response to the IRS's annul request for comments on items for its plan, APA requested additional guidance concerning on-demand pay.
- APA News, California Bill Regulating On-Demand Wage Payment Moving Forward (7-5-19)
- PAYTECH, July 2019, "Gig Economy, On-Demand Pay Big at the 2019 Capital Summit"
- Payroll Currently, Issue 6, Vol. 27, "DOL Issues Opinion Letter on Worker Classification": The opinion letter (FLSA 2019-6) analyzes whether workers for a virtual marketplace company were employees or independent contractors under the FLSA.
- PAYTECH, June 2019, "The Future of Work Requires Instant, On-Demand Payouts"
- Payroll Currently, Issue 4, Vol. 27, "Special Report: APA's 2019 Capital Summit": At the 2019 conference, almost every session touched on two topics: the gig economy and on-demand pay.
- PAYTECH, June 2018, "Special Section: Gig Economy Growing Strong"
- PAYTECH, May 2018, Government Corner, "Demand Answers About On-Demand Pay"