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Earned wage access might be the next big work perk. Employees have long accepted a fortnightly or monthly pay cycle. However, new models are changing the way we think about wages and how soon they should be paid.
Let’s break down what earned wage access is, how it works, as well as its pros and cons so that you can decide whether to offer this innovative pay cycle model to your employees.
What is earned wage access?
Earned wage access lets employees access their wages as they earn them. Rather than having to wait for their scheduled pay day, they can request to receive a portion of their wages after their hours have been worked and approved.
The employee will need to pay a transaction fee, which could either be a percentage or a fixed amount. This fee and the wages paid in advance will be deducted from their next pay slip.
Making the pay cycle more flexible can have benefits for businesses and their workers. Businesses can use earned wage access to attract and retain staff, and employees can access money that they have already earned to cover costs when the unexpected arises.
Why is earned wage access gaining popularity?
The cost of living in Australia has been rising, putting employees under greater financial pressure. As a result, new pay models that give the ability to access pay on demand and early have been designed to address people’s short-term liquidity needs.
How does earned wage access work?
There are two different ways employees can access their earned wages early.
- Direct to consumer fintech platforms and pay advance apps use data from an employee’s bank account to provide access to cash before pay day based on their deposit and withdrawal data. The transaction is facilitated without involvement from the employer.
- Employer integrated platforms are offered via an employer’s payroll system, using the employee’s approved hours data to provide access to earned wages before payday.
An employer integrated earned wage access platform like foundU ensures that net entitlements are updated in real-time. This means that the pay advance is automatically deducted from the next pay slip.
Continuous award interpretation is also applied, so that an employee’s available pay based on worked and approved shifts is calculated correctly. Employees can also withdraw their earned wages directly to their bank account within seconds.
For foundU customers, offering earned wage access is as simple as switching the Wageflo tool on.
What’s the difference between earned wage access and pay on-demand?
Pay on-demand makes a worker’s wages available when they want them. If a worker has completed a shift, they get immediate access to 100% of their earned wages. They could draw the money down straight away or let it build up. A transaction fee is involved for early access and how much of their earned wages they want to withdraw early is their choice. Earned wage access has more controls than on-demand pay. It lets employees access a percentage of their accrued wages before the current payroll cycle and the available amount is determined by their employer. Businesses can also decide when they want to make earned wages accessible during the pay period.
What’s the difference between earned wage access and a payday loan?
Earned wage access is not the same as a payday loan. A payday loan is a short-term, high interest loan that lenders make based on an employee’s income. In general, the amount of the loan is matched to a portion of the employee’s next paycheck.
Earned wage access is not a loan that incurs interest. It gives employees access to the wages they have already earned for the cost of a small, one-off transaction fee. In this model, employees are accessing money they have already earned. They are not borrowing against their potential earnings.
What are the benefits of earned wage access?
Sometimes people have to fund life’s demands before their regular payday. Unexpected car issues, home repairs, and medical expenses don’t always come at a convenient time.
Earned wage access gives employees access to liquidity, without having to access expensive credit products, such as pay day loans and credit cards with high interest charges. It also helps them stay in control of their own cashflow, without having to ask friends or family for help.
This can be particularly meaningful for people working on a shift-based, hourly wage as any shortfalls in their regular income can be softened. Flexible payments make it easier for them to manage their cashflow as they work variable hours around their commitments.
Offering flexible payments can also make your business more desirable to work for as employees know they will have more breathing room in their day-to-day and emergency spending. As a result, you may find attracting and retaining employees easier. Being able to access wages before payday can also incentivise workers to pick up extra shifts.
You also don’t have to incur any additional costs as a business to offer earned wage access, as employees cover the transaction fee.
Here is what some of foundU's earned wage access customers have said after switching on the tool.
“The earned wage access feature is cost effective, and there is no impact on us. With employees themselves able to log in and draw down on their own wages, there’s no back-end administration or even liability risks for us or our clients. It’s also almost safer for the staff because it’s an internal system. They don’t have the risk of giving their bank details to an external company, it’s all within the one system.”
Darren Winmill, Managing Director of Omni Recruit
Read the Case Study
“Earned wage access sets us apart from other agencies – we can offer something that others can’t. It’s all handled by the platform, so there is zero administration on my end – and payroll remains unchanged! We feature it when recruiting and candidates are always very positive when this is mentioned.”
Tim Rippon, Managing Director of NurseU
Read the Case Study
What are the disadvantages of earned wage access?
Some employers are hesitant to offer earned wage access in case their employees withdraw too much money from a future paycheck, leading them into a cycle of dependency. While the offering does offer some financial relief in emergencies, it may not address the root causes of cash flow challenges and financial stress.
That’s why putting in some financial wellbeing guardrails in your earned wage access offering can be powerful.
How can I offer earned wage access and foster financial wellbeing?
If you want to protect the financial wellbeing of some of your employees, then you can consider the following control measures:
- Ensure that the transaction fees are transparent and communicated to employees. For example, foundU only charges a flat fee of $5 per transaction, so that employees pay the same amount regardless of the withdrawal size.
- Make remaining balances and potential earnings based on rostered hours visible for employees. This will help them calculate how much money is safe to withdraw from the next pay period.
- Use an earned wage access solution that is integrated with or built into your payroll platform. For example, foundU’s built in Wageflo tool factors leave and allowances into available wage and potential earnings calculations to prevent wages from being overdrawn. It also lets employees build a budget in their employee app and calculate if future expenses can be met.
- Place limits on the amount of pay advances, how frequently they can be made, and who can access them. For example, foundU enables you to set a percentage of earned wages that are eligible for withdrawal.
- Place messaging in your earned wage access platform that encourages employees to withdraw responsibly.
- Offer broader financial wellness initiatives, such as foundU’s in-built budgeting tools, saving products, financial education, and employee benefits.
Reduce the financial stress that you might not be able to see
Talking about money can be hard and many employees may be hesitant to ask you for a cash flow solution like earned wage access. Without offering it, you may never find out that they need support and they could seek out more expensive credit options. However, by making it available, you could ease their financial pressure with no questions asked and at no extra cost to you.
