Getting early access to wages is one way employers are helping workers better manage their expenses and avoid short- and long-term borrowings – like payday loans or dipping into retirement plans for an immediate cash need.
This tool is a natural way to give employees more control over access to their earned wages. It’s also a competitive way for employers to offer flexible wage options.
The first step in implementing a successful early wage program is to define strategic and financial goals related to the company’s values and the needs of its employees. This will help align the program with the company’s mission, business strategy and culture.
When considering an early-wage entry scheme for employers, they should ask themselves the following questions:
· Will it increase employee engagement, a fundamental element of improved productivity?
· Will it reduce employee requests for advances that consume HR time?
· Will it reduce borrowing from employees’ 401 (k) plans, take out payday loans, or intentionally overdraw bank accounts to meet immediate cash needs?
· Will it offer withdrawal options to compete with other employers (e.g. Uber) who pay daily wages?
Working through these cultural issues in advance clears the vendor selection process significantly and enables employers to create a program that rewards their investment with measurable employee engagement and productivity gains.
With the strategic goals and financial wellness goals set in place, there are several due diligence considerations to help employers effectively evaluate available services and ensure a fully compliant and comprehensive solution for early pay access.
Actual wage accrual compared to estimates
Using salary, time, and labor data to calculate net wage provisions is fundamental to creating a program where employers can be confident that workers will have accurate access to their wages and that there will be no liabilities.
If wage access is based on an estimate of time or salary data and is financed by a third party, it is by definition the provision of an advance or loan to be collected from that third party at a later point in time – on or after payday. This creates liability to third parties on payday and can create additional costs and stress for the employee if the advance or loan cannot be repaid in a timely manner. Advance and loan providers must be licensed and a registered money transfer agent in each state in which they operate.
Ultimately, if advances are not deducted from payroll, but rather collected by a third party, the employee’s salary statement may not match the employee’s payroll, which can create compliance issues and confusion. The third party must also act as a wage payer on payday. The accuracy of employee payrolls, the reconciliation of payrolls, and maintaining the direct link between employer and employee are important factors in designing early wage programs.
Adequacy of funds for immediate cash needs
Early wage access should provide meaningful liquidity to help employees meet real emergency fund needs like an unexpected medical bill or a car repair. Programs designed for part of a single payment day, or an average of $ 29 per transaction, do not provide sufficient amounts to meet most emergency needs, but simply fund short-term discretionary expenses.
Policies and Fees
Customized guidelines for frequency, percentage of net wage accrual, and minimum or maximum amounts ensure responsible access. Employers should avoid program design components such as short decision windows that lead to impulsive employee actions and are counterproductive to financial wellbeing goals.
Employers need to consider the inherent challenges of employee transaction fees and frequency of use. First and foremost, fees should be transparent to users at the time of early wage access and reflect the overall and expected usage profile. Transaction fees should be limited to a reasonable maximum monthly amount to ensure that employees are being provided with reasonable value without incurring additional financial burdens. Confusion can arise when a provider cuts advertising-based transaction fees to encourage more usage. Requiring employees to use a pay card to receive their regular salary and withdrawing fees from the card or charging a subscription fee to the service whether or not it is used does not mean that the service is available is free for employees or employers.
Withdrawals only by credit card
Employers cannot require employees to deposit all of their paychecks into one card, so avoid programs that use a card-only withdraw approach. The card should only be used for instant access to wages. State wage laws and regulations vary in the use of payment cards, so employers should be sure that their providers in all relevant states comply with the regulations.
System security and audit verification
The validation of system security, scalability and certification by external auditors is an important step in the due diligence process. Program systems and processes should be at least SSAE16 certified. Security processes and payment providers should have even higher certification levels.
Regulatory review and consumer representation
Early wage programs interact with various regulators, including the Consumer Financial Protections Bureau, the US Treasury Department, the FDIC, the Federal Reserve, and state wage and labor agencies. Program models should be regulatory and employers should not rely solely on legal advice from in-house attorneys. Vendors should also have a high level of engagement with consumer advocates and political groups.
It’s important to remember that the goal for employees to achieve financial health is to get past the paycheck-to-paycheck cycle with reasonable savings and a game plan for what to do next.
So what comes after early wage entry? The answer is advanced financial wellness support that provides employees with financial management tools, including budgeting, planning, goal setting, education, and referrals. Enabling early wage access is a valuable and necessary tool in the Financial Wellness Toolkit.