How On-Demand Pay is Challenging the Traditional Paycheck Model

On-demand pay, also known as ‘earned wage access’, has recently arrived at the party that is our professional lives—but what exactly is it?

The clue is in the name. As a worker, you can demand (or request, if you’re feeling polite) to have access to part of your paycheck before your usual payday. This is essentially the opposite of garnished wages, which is where money is withheld from your paycheck.

So, if it’s the middle of the month and you need to pay out to get your car fixed or boiler replaced, and then realize it’s another two weeks before you’ll be able to afford groceries, you can request some of your money early.

In 2023, an increasing number of people are being forced to live paycheck to paycheck or rely on credit, so access to money before the end of the month can be really helpful in emergencies. This benefits employees for obvious reasons—but it also means companies don’t have to worry as much about their staff getting stressed out and sick as a result (remember, what’s good for the tree is usually good for the forest too).

What is on-demand pay—and how does it work?

As we summarized above, on-demand pay allows you access to your earned wages when you need them. Your pay cycle remains the same, but you can withdraw funds you’ve already earned at any point. On-demand payroll tends to give workers more control over their finances and offers a financial safety net.

With an on-demand pay system, you can usually use a self-service portal. Some systems might charge the employee or employer a small fee when an early withdrawal is made. Your employer will often have to approve the request, and then payment is sent immediately to you without any more paperwork. Your payroll is updated automatically to reflect this transaction. Integration with existing accounting software can help streamline this process and ensure accurate financial records.

Another potential benefit of using an on-demand pay system is the convenience of using an e-signature for the necessary paperwork. This eliminates the need for physical paperwork and allows for faster processing of payment requests.

Much like contactless payment, on-demand payment is challenging the traditional paycheck model.

Benefits of on-demand pay for employers

On-demand pay systems can benefit employers by offering payment-related services such as payment processing, which can help streamline their payroll process and reduce administrative costs. Offering on-demand pay is a boon for employers as well as employees for the following reasons:

1. Investment in employee wellbeing

On-demand pay offers support and flexibility for workers, which is invariably good for employee wellbeing and team morale. It also helps foster a supportive and positive work culture, which is another major upside.

2. More productive employees

It shouldn’t come as a surprise that happy and supported employees are likely to be more productive. If you’re not stressed about finances and feel like your colleagues and managers care about you, you have the headspace and motivation to focus on being productive in your role.

3. Attracting the right people

Along with tools like labor forecasting, offering on-demand pay can give your company a leg up over the competition when it comes to both hiring and retaining great employees. The more you can offer, the better, and flexibility is up there with the qualities people look for in an ideal workplace.

Hiring new people is an expensive process, so retention delivers maximum monetary benefit to your business.

Possible drawbacks

However, there are some downsides to balance these benefits. Firstly, processing payments can take up a lot of payroll employee time, so adding another layer of complexity, such as earned wage access, can make things even more challenging.

There’s also the issue of potential small fees per transaction, which poses a difficult question regarding whether this should be covered by the employer or the employee.

Another issue is that not all companies have the ability to pay their staff throughout the month because of how their systems are set up e.g. they might not have the liquidity necessary for this option.

This approach can also have an impact on taxes and how they’re calculated, so it may become necessary to hire an accountant to verify this along with taking care of the company’s SOC 2 audit checklist.

Benefits of on-demand pay for employees

There are many benefits to being able to access your money when you want it, but we’ve narrowed this list down to the top four.

1. Paying bills on time and avoiding late fees

You know what’s stressful? Worrying about how you’re going to pay your bills and rent each month, especially if they come out of your bank account at weird times. Unless you’re very good at managing your finances (or more likely, very lucky), you’re going to struggle on occasion to get everything paid on time.

Being able to access your hard-earned money earlier than usual will help you pay your bills on time and avoid any pesky late payment fees. When you already have to pay an extortionate amount of your salary just to stay afloat during the cost of living crisis, the last thing you want to do is pay interest on top.

2. Combating unexpected expenses

If you’re familiar with the Real World, you’ll already be well-acquainted with the phenomenon of the Unexpected Expense. Whether it’s your boiler breaking, a cute but unwelcome mouse family appearing in your loft, or an expensive birthday present you’re guilted into buying, life is full of these.

If you don’t want to use a credit card and rack up debt, an on-demand pay system can protect you from these pitfalls.

3. Fewer loans

Some people will find themselves in a position where they have to consider taking out a loan at one time or another, and unfortunately, the greater your financial bind, the larger the interest rates on your loans are likely to be. It’s a vicious cycle.

But if you can dip into your salary before your usual pay date, you might be able to say “nay” to the loan sharks and use the money you’ve already earned to tide you over instead.

4. Less stress

Even if you never use an on-demand pay system, knowing it exists can take a lot of stress from your shoulders. It’s reassuring to know you have a safety net, that your employer values you and has a system in place to help, and that you won’t have to ask your mom to stay at her house while you Airbnb your place to pay the bills.

There are many benefits to being able to access your money when you want it, but we’ve narrowed this list down to the top four. One potential benefit of on-demand pay for employees is increased employee appreciation. By offering this flexible payment option, employers can demonstrate that they value their employees' financial wellbeing and are willing to invest in their happiness and satisfaction. This can help foster a positive work culture and lead to higher team morale. Additionally, on-demand pay can help employees pay bills on time, combat unexpected expenses, avoid loans and reduce stress. However, there are also some drawbacks to consider.

Possible drawbacks

So, what are the downsides? While having access to your finances on demand can be helpful, one drawback is having fewer funds in your monthly paycheck once your request has been processed. Obviously, you’ll still have the same amount of money overall, but whatever you take out mid-month won’t be available at the end, so you’ll need to carefully manage your cash to combat this.

Another drawback is the fee you might have to pay to use an on-demand service. If your employer covers it, then you’re fine, but if not, this is something to consider.

A penny for your thoughts

Having the option to be paid on demand offers employees flexibility and financial stability when compared to the traditional paycheck model—provided, of course, that they’re able to properly budget and manage their finances.

It can also be a good way for smaller businesses with lower budgets to offer something of value to attract and keep good workers. However, companies need to ensure they have the necessary cash flow to offer this level of flexibility before putting it into practice.