Could Payroll On Demand Be a New Option for Paying Employees?
Employers have multiple methods to choose from when issuing employees’ net pay. Over the years, the options have included giving them an envelope of cash (yes, it is still done from time to time) to scrips (company money) to checks, direct deposit, and paycards.
Taking the payroll process a step further is a new option available now for employers to use when paying employees. It is commonly referred to as payroll on demand.
How Payroll On Demand Works
Payroll on demand allows the employee to request an advance on wages based on hours already worked during the pay period. The employer could process this internally, which would require tax withholding and deposits by the employer. Another option is to use a vendor that would provide the benefit to employees using hours worked during the current pay period. If the employee needed to draw on those hours, they would contact the vendor to request an amount needed via payroll on demand.
At that time the vendor would calculate the amount available based on the employee’s hours for the current pay period and mandatory deductions. The vendor would calculate the amount available, then deposit the funds into the employee’s bank account or load it onto a debit card. At the end of the pay period, the vendor would provide a list or file of the on-demand requests processed during the pay period for the payroll department to enter or add to the payroll processing. The payroll cycle would process as normal with a deduction withheld for the amount the employees received using payroll on demand during the pay period.
An Industry Paves the Way
One type of industry has been using this process for several years. Over-the-road drivers for trucking companies have used the “draw” process using mileage and gallons of fuel to calculate the amount of draw available. It is an involved and complicated calculation but an interesting process that has worked for the industry for decades. Drivers are generally allowed to draw a fixed amount per mile. For example, if the set rate is 32 cents per mile and the driver has accumulated a total of 500 miles during the current pay period, they would be able to draw $160. The draw would then be loaded onto their debit card. The more miles driven, the more the employee could request as a draw against the coming pay date.
Benefits of On-Demand Pay
The availability of this option could be a benefit to the company and your employees in multiple ways.
For the company, payroll on demand could do the following:
- Prevents issues with cash flow management
- Improves recruiting funnels and increase employee retention
- Provides employees the benefit of not needing to wait until the end of the pay period to receive initial funds
- Helps employers stay competitive in the market
- Improves employee morale and helps to prevent distractions, which improves employee performance and safety
- Helps with the need to hire a seasonal workforce
- Encourages employees to come to work, with fewer employees who are no-show
From the employee’s perspective, payroll on demand could help an employee by the following:
- With paying a bill on time before penalties or interest are charged
- With unforeseen expenses such as car repairs or medical bills
- Deal with day-to-day expenses
- Improve financial wellness
Employers have the flexibility, taking federal and state laws and regulations into consideration, to decide which pay schedule is best for the company and its employees. They can even have different pay schedules for different facilities or different types of employees. For example, exempt employees could be paid on a semimonthly or biweekly schedule, with hourly employees having a weekly payroll cycle.
Communicate, Answer Questions
As with any new program, employees will have questions. If the on demand pay benefit is being handled by a third-party vendor, then the vendor should provide materials to distribute to employees, and the payroll department should be prepared to answer questions during the initial implementation and going forward. For example, employees may have questions when the net pay on payday is not what they were expecting. Regardless of the schedule an employer has set for the pay date, ranging from daily to monthly, it is ultimately the employees’ responsibility to manage their financial welfare.
LaTisha O’Neal, CPP, is a Payroll/HR Consultant and a member of PAYTECH’s Board of Contributing Writers.