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Blog Banner of What Is On-Demand Pay and How Does It Work

What Is On-Demand Pay and How Does It Work?

Salary is the primary motivator for employees to stay at a job in the first place. For employers, however, it can be challenging to decide how and when to pay employees in a way that will attract them and keep the business sustainable.

The topic is on-demand pay, but to understand what it is and whether your organization must offer it, it is necessary to know why this pay type exists.

For some employees, more than the amount of the paycheck the frequency is important to meet their needs to pay their bills simultaneously. Such a situation is strenuous for them because costs like late fees can put them in a vicious cycle of payday loans that is hard to break.

This is one of the reasons why workers always look for pay and other financial benefits when looking for a job. Routine and steady pay benefits the employees as well as the employer. It draws in more talent and is incredibly enticing for young adults who recently got independent and started paying bills themselves.

Furthermore, it also shows your existing employees that you value them and understand their hard work. The easiest way to help your employees attain financial stability and avoid strain is to offer them a routine and reliable paycheck. Even if you already provide them with this facility, you can introduce extra flexibility by allowing them to access their payments other than the designated payday.

What we suggested above might sound easy to implement, but it is not, and things can get out of hand fast if you need to be more strategic about it. This is why we created this guide about on-demand to help you understand it better.

What is on-demand pay?

On-demand pay is a wage payment method that allows employees to receive their wages as they earn them. Usually, companies allow employees only to access a certain percentage of their salary per pay period, while the rest is paid as usual on the standard payday.

However, on-demand pay allows workers to have access to their wages when they require it. It is essential to consider that as this mode of payment can have multiple transactions for the same salary, the fee per transaction can result in overhead that must be planned.

Typically, the price for the use of on-demand pay options is included in the cost of the payroll provider charges. But standard practice is to charge the employees for the service and not the employer, unlike payroll processing. As a manager, you must decide what policies should dictate the processing of on-demand pay as it is not a standard transaction like payroll.

Also, the limits need to be discussed for implementation because an unregulated number of pay demands can stress the company’s financial stability.

How does on-demand pay work?

The on-demand pay provides employees access to a limited amount of money between paychecks to meet unpredictable or urgent expenses. It gives them a sense of financial stability and security, allowing them to focus on work.

There are several solutions to handle on-demand pay depending on when and how employees withdraw funds. Both parties, the employer and the employees, will undoubtedly have different opinions on how this mode of payment should work. It would be best if you balanced the needs of both parties as fairly as possible.

Firstly, you must weigh the organization’s budgeting and cash flow options to ensure that the on-demand pay implementation will only affect the business’s ability to operate daily. Next, you can ask the employees for feedback to know their concerns and demands.

Once you have all the data you need, you can move forward by determining the protocols that will dictate how on-demand pay will work within your organization. If you want, you can implement more than one type of solution for this to work. Here are some examples that can help.

Examples of on-demand pay services

Major US corporations like KFC, McDonald’s, and Taco Bell employ the services of Instant Financial. It is a payroll service providing more control in the hands of the worker. Instant financial allows employees to receive a smartphone notification about a shift, and they can decide if they want to collect a paycheck at the end of the day.

If they select same-day payment, the money is transferred to the prepaid debit card or directly credited into their bank accounts. Another solution is to allow employees to use their pay schedules. It can work for both full-time and hourly employees. For example, Gusto’s Cashout program will enable employees to avail up to 40% of their paychecks as on-demand pay, with a maximum $ 500 limit.

According to the Bureau of Labor Statistics reports, nearly 37% of employers offer two-week pay to workers. This is an excellent way to allow financial freedom to the workers while keeping the cash flow at the company at a sustainable level. However, according to Nelson Lichtenstein, a history professor at the University of California Santa Barbara and director of the Center for the Study of Work, Labor, and Democracy, there are challenges associated with offering on-demand pay.

He explains, “I think this creates more chaos and insecurities. If you get paid every day, you are scrambling every day.” He argues that offering pay every single day eradicates the built-in buffer that exists. However, a two-week on-demand pay solution is like forced savings that give individuals more freedom to plan how to spend money. It also is beneficial for budgeting.

This is why a two-week model might be most beneficial compared to other solutions if you plan to offer on-demand pay to your employees. It provides the much-needed buffer to save while still enjoying the freedom to meet urgent expenses without taking out a loan.

The pros and cons of on-demand pay

On-demand pay has its advantages and disadvantages for both parties involved. The outcome depends on how and why you adopt on-demand pay for your organization.

Advantages for employees

1. Creates financial equity for employees

On-demand pay help workers better manage their finances whether they want to invest earned wages or need to pay for urgent auto repair. Expenses can occur at any time; with this mode of payment, employees can get their money sooner. This flexibility allows them to receive and save money on their own time.

It is better for financial security as on-demand pay can help them meet unexpected bills or urgent expenditures to cover the expenses rapidly. As per Federal Reserve research, over 35% of adults would be unable to cover a $400 emergency bill. This is why many workers turn to payday loans when an emergency arises, but the high interest on search options further aggravates their financial instability. On-demand pay is a much more sustainable option.

2. Financial well-being leads to physical well-being

Stress associated with financial instability can cause serious health consequences. Options like on-demand pay allow workers to maintain a good work/life balance and be more productive at work by reducing financial worries and stress. Providing employees more say over their remuneration improves their general quality of life.

The drawbacks for employees

1. Fees

On-demand pay has an additional fee, the same as paying ATM fees. It can be frustrating for employees to pay a fee for receiving their wages.

2. Taxes

While most on-demand pay services don’t tax employee withdrawals, these transactions are still liable to taxation. Employers are required to detect these taxes from the upcoming paychecks making the final payout less than the employee anticipated.

Benefits for employers

1. Better employee retention rates

Employers who offer on-demand pay are seen as more caring by the workforce, improving their employer value. It helps with employee retention and attracts others to work for the organization.

2. More productive employees

Personal finance issues are highly distracting for employees. When you offer on-demand pay, you provide employees with financial security and a sense of stability. This encourages and motivates them to be more productive at work.

The cons of on-demand pay for employers

1. Pay errors

On-demand pay dramatically increases the number of transactions for the payroll. There are chances that employees will receive paychecks that include paid on-demand hours. Such errors mean employers pay the wages twice.

2. Taxes

As mentioned above, employers must deduct taxes on on-demand wages when they issue standard paychecks; failing to do so makes them liable to action from the IRS.

How Truein can help employers?

Truein is a cloud-based, hardwareless employee time and attendance software that features scheduling and overtime management. Managers and supervisors can use it to accurately calculate the work hours to ensure that employees are paid only once. As it easily integrates with most payroll systems, it can minimize the chances of pay errors.

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We hope you now understand how on-demand pay work. It is a tool that, if implemented correctly, can help both employers and employees. It can significantly boost productivity by relieving employees of financial stress resulting in a more productive and better-engaged workforce.

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