If your employees constantly count the days until payday, offering earned wage access may ease some financial stress. Earned wage access is a rising employee benefit among employees and their teams.
Is it worth offering to your employees? Explore the top benefits, potential downsides, and legal considerations to learn whether this is a worthwhile payment option for your organization.
What is earned wage access?
Earned wage access (EWA), also called on-demand pay or early wage access, involves providing employees with access to their wages before the regularly scheduled payday. Employees can initiate an instant transfer to access their accrued pay rather than waiting another week or two until payday.
While this may sound like a headache for the payroll and accounting department, it’s relatively simple for employers if you use an earned wage access service like DailyPay or Payactiv or a payroll provider like ADP that offers on-demand pay.
Earned wage access will work differently depending on the service used. Generally, the employee can access the wages earned through time worked, but each EWA service is different. Some limit it to half of their salary or some other metric.
Benefits of offering earned wage access
Learn how earned wage access can benefit employees as well as employers.
Alleviating stress
In PwC’s 2023 Employee Financial Wellness Survey, 57% of employees surveyed said that their finances are the largest source of stress in their lives. Stress can impact an employee’s productivity, focus, and attitude, so if there is a way to alleviate this stress, it’s a win-win for your employees and your company.
Offering earned wage access gives employees access to funds when needed instead of making them wait for payday. Since many jobs pay biweekly or bimonthly, the wait between checks can be extended for employees, especially if they encounter unexpected expenses like car troubles.
By offering a quicker opinion, you can alleviate employees’ emotional and financial stress when an unplanned expense arises.
Improving employee financial wellness
Offering early pay can help employees enhance their overall financial wellness. Early wage access typically comes with minimal employee fees, giving them a cost-effective way to access funds when needed.
Without early wage access, employees may incur hefty overdraft fees, take out cash advances, use high-interest credit cards, or turn to predatory payday loan lenders, negatively impacting their financial well-being.
Earned wage access apps generally charge a small transaction fee rather than cheaper interest fees. EWA also borrows against money the employee has already earned and is often automatically repaid when the employer processes their regular pay cycle.
This setup makes it harder for employees to overborrow or default. Overborrowing and defaulting are common issues with traditional loans and credit card spending. These issues can damage their credit score and financial wellness over time.
It’s an inexpensive employee benefit to offer
Small businesses often can only afford to offer some of the employee benefits and perks that larger companies can, which can usually impact recruiting and retention. As such, taking advantage of low-cost or free perks you can offer employees is incredibly helpful.
Offering earned wage access is generally inexpensive or even free for employers. Some EWA services, like PayActiv, don’t charge employers setup or recurring fees for providing the service to employees, so it’s an affordable perk to offer.
Improving recruiting and retention
Offering employees a new benefit or perk can significantly impact recruiting and retention. Employees consider these benefits, including earned wage access, when deciding whether to work for your company.
In a study from Hanover Research, 95% of employers offering EWA said that they believe it positively impacts employee retention. Though DailyPay, an EWA solution, sponsored this study, take it with a grain of salt.
Potential drawbacks of earned wage access
Earned wage access has plenty of perks for employees and businesses but also has a few potential drawbacks.
Encouraging poor financial habits
On-demand pay can be a big help for unexpected financial issues, but it may also encourage irresponsible spending. Even though EWA usually doesn’t have the high interest rates of credit cards or payday loans, it can still share some of their drawbacks.
Repayment must occur when the employee’s regular payday arrives, and early wage withdrawals are often automatically deducted from their paycheck or bank account. Employees are then left with a smaller-than-usual check that may not cover their expenses like rent and groceries.
Some employees may then fall into an unhealthy cycle of continuously accessing their funds on demand instead of practicing good budgeting and saving practices. EWA fees are smaller than standard lending fees or interest rates, but they can also eat into an employee’s paycheck if they continuously withdraw money as they earn it.
Compliance uncertainty
EWA is rising nationwide, and regulatory bodies still need to catch up. They operate in a bit of a gray area, with various state and federal regulatory bodies currently adopting or considering enhanced guidelines around EWA offerings.
That can intimidate small business employers. Thankfully, most of the current proposed legislation would impact earned wage access services more than the employers themselves. Learn more about the ongoing legal proposals below.
Legal considerations around earned wage access
EWA has been growing in popularity recently as an employee benefit, and it’s caught the attention of regulating bodies. The laws around EWA are evolving, so employers planning to adopt EWA will want to pay attention to EWA regulations as they develop.
CFPB interpretive rule
This year, the Consumer Financial Protection Bureau (CFPB) proposed an interpretive rule regarding fee transparency in EWA services. The CFPB stated that paycheck advance programs like the EWA app are consumer loans subject to the Truth in Lending Act and must disclose these services’ costs and fees to workers.
Earned Wage Access Consumer Protection Act
The Earned Wage Access Consumer Protection Act was introduced in Congress in early 2024. It would regulate direct-to-consumer EWA services and employer-integrated on-demand pay offerings if passed.
It prohibits discrimination in EWA lending, requires consumers to receive disclosures regarding their rights and any fees associated with EWA usage, and more.
Also, it requires that EWA services comply with the Electronic Fund Transfer Act when seeking repayment from an employee’s direct deposit account.
State laws
Some states have enacted or proposed legislation around EWA. Nevada, Missouri, Connecticut, South Carolina, and Wisconsin currently have EWA regulations. These were enacted in 2023 or 2024, so they are recent developments. Other states are also looking to follow suit.
The California Department of Financial Protection has also considered legislation around EWA over the last year. The state has considered providing similar guidelines around EWA advances after compiling data findings on earned wage access usage and fees.
California currently regulates payday loans and has noted some similarities between payday loans and EWA advance payments.
How to implement earned wage access for your employees
If you believe that EWA may be a good fit for your team, here are the steps to implement an earned-wage access program for your organization.
Choose a vendor
Explore your opinions and find an earned-wage access provider that will suit your needs and preferred process. EWA services often integrate with your payroll system and time and attendance program. You’ll want to ask vendors how their service will integrate with your existing tech tools and payroll processes.
When choosing an EWA provider, it’s essential to inquire about fees. You’ll want to know what it’ll cost your business to offer an earned-wage access program. However, you should also make sure you’re clear on what it will cost employees to use this service.
After all, this offering aims to help your staff’s financial well-being. If you choose a vendor that charges high fees, it may have the opposite effect.
You’ll also want to ensure that the vendor is transparent about its fees with employees and follows all applicable regulations.
Onboard with the service
Go through the setup process and provide the required information to the EWA service. You’ll typically need to integrate your existing tech systems or otherwise give the EWA app access to timekeeping and compensation data to accurately track each employee’s wages.
Educate employees
Introduce the new offering to your team. Coordinate with the vendor to see if they can offer an information session or webinar to help employees understand how early wage access works.
Help them learn how to access EWA within the relevant software platform or mobile app. Ensure employees understand how the service operates. Additionally, clarify the fee structure. This empowers them to make informed choices about using earned wage access for early fund access
This is also a good time to reintroduce employees to your financial wellness offerings. Some EWA vendors also offer financial education, and most employee assistance programs include financial planning or services. Shouting out these options will help remind employees to use pay advances responsibly and give them resources to work on their budgeting and savings.
More Resources:
What’s the deal with on-demand pay?
Paycor vs. ADP Workforce Now: Which is right for your needs?
3 more states address on-demand pay
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