Current status and future of on-demand pay
Earned wage access (EWA), also known as on-demand pay, continues to be an integral part of the employee benefits packages offered by employers. With technological advancements enabling instant access to earned wages, employees increasingly expect such financial flexibility in managing their cash flows, which can spur adoption and growth.
Some of the resistance points from payroll professionals and concerns with tax compliance are being addressed through communication and the use of data analytics, among other things. However, it remains important for employers to have a purpose and game plan for implementing such a program to benefit both the employees and the business’s bottom line.
Adoption and growth
Frank Dombroski, the founder and CEO of FlexWage Solutions, explained that EWA continues to gain momentum and also evolved over the past few years to meet the lifestyle needs of younger workers, in addition to offering the benefit to help employees manage their cashflow. He believes this trend is indicative of the growing recognition of on-demand pay’s potential to address employees’ immediate financial needs while aligning with employees’ expectations for quicker payout options.
Dombroski also observed a greater interest in EWA at PayrollOrg’s annual Congress in Nashville in May. “The number of payroll professionals who either have or are looking at implementing earned wage access has grown from 2% eight years ago to nearly 50% now,” he said.
He noted that “it is still early in the game…and there’s a lot of open field still” regarding the additional potential for adoption and growth of EWA, but that the increased interest shows promise, despite some earlier resistance.
Overcoming resistance points
Initially, resistance towards EWA stemmed from misconceptions and concerns among payroll professionals regarding its resemblance to payday loans and the potential for irresponsible employee behavior. “We started [FlexWage] in 2009, and really in earnest in 2010,” Dombroski started. “So, there was no baseline understanding [and] all the payroll professionals could do is equate it to a payday loan and it took a lot of education to get them through that.”
Overcoming these resistance points required strategic policymaking, including the establishment of usage guidelines to mitigate risks of misuse. “We provided some guardrails for the employers to establish that help them ensure that employees are not going to hurt themselves,” Dombroski said about encouraging responsible EWA use.
He added that by proactively addressing on-demand pay concerns through education and policy frameworks, the perception of EWA evolved from skepticism to acceptance among payroll professionals, paving the way for more widespread adoption in modern payroll practices.
Data analytics in on-demand pay
Data analytics can significantly enhance the management of on-demand pay systems. It empowers employers with insights to fine-tune their compensation offerings and track usage patterns, thereby facilitating informed decision-making. Analytical tools ensure accurate tracking of employee earnings and aid in predicting financial wellness trends within the workforce.
Dombroski believes EWA data showing its benefits, such as employee usage data and research demonstrating on-demand pay’s appeal as a job consideration factor and ability to improve financial wellness, has been more impactful than AI in driving adoption among payroll professionals, while artificial intelligence (AI) can assist with supplementary tasks like content generation.
Compliance, tax compliance, and constructive receipt
Compliance with tax laws, especially regarding the constructive receipt doctrine, is crucial when implementing on-demand pay programs. It is important for employers to note that the IRS views wages as paid once the employee has control over them. The correct handling of tax obligations, withholdings, and payroll deductions is vital to staying within legal parameters.
However, when discussing a proposal in the Treasury Department’s fiscal year (FY) 2025 “Green Book” to amend the Internal Revenue Code to treat the payroll period for EWA as weekly and clarify that such programs are not loans for federal tax purposes, Dombroski clarified that it was not an official proposal or regulation, but instead, a suggestion that weekly pay cycles should be explored. Indeed, this suggestion has appeared in the Department’s proposals since the FY 2023 version, with no official legislative action taking place.
Dombroski noted that moving to weekly pay cycles would have minimal impact on the Treasury’s tax collection, even if a small percentage of taxes were collected a week earlier, and added that the proposal would impose a significant cost burden on employers.
Carl Morris, Vice President of Compliance at FlexWage, provided a further history about EWA and tax compliance that he and Dombroski experienced nearly a decade ago when the two were invited to the White House to meet with Treasury and the National Economic Council (NEC). “The topic of constructive receipt never came up at any time during that conversation,” Morris stressed.
“Doing anything about this is not going to help them or hurt them one way or the other if they just leave it as it is,” Morris continued regarding his observation that Treasury’s mention of constructive receipt was more reactionary in nature due to the growth of the EWA industry.
Treasury’s FY 2025 proposal has an effective date of December 31, 2024, however, as with the FY 2024 and FY 2023 proposals, no legislative action imposing adherence to it has occurred.
Defining and regulating EWA vs. payday lending
EWA programs are distinct from payday loans as they allow employees access to wages they’ve already earned, without high rates or fees, and do not involve credit checks or reporting. Morris expressed concerns with EWA legislation in some states where there is a failure to differentiate between employer-based EWA and direct-to-consumer models. “If you look at the research and data on that, they are totally not, and the direct-to-consumer model is truly a modified payday loan,” he said.
Morris added that some of the legislation exempts any EWA providers from existing lending laws, money transmission laws, and wage assignment laws, effectively clearing the path for providers with potential compliance issues.
Dombroski explained that other states, such as California, Connecticut, and Maryland “are taking a much more prescriptive approach to defining what EWA is,” which differs from Nevada’s on-demand pay law – one of the first states to develop EWA regulations – where “there’s almost no requirement of what constitutes earned wage access versus a payday loan.”
He referenced the Bureau of Consumer Financial Protection’s (CFPB) 2020 Regulation Z regarding defining the elements of service that distinguish it as earned wage access versus a payday loan. “And its got to be employer centric,” he added.
Dombroski also noted that EWA programs should “have real payroll data, real-time and labor data” to verify what the employees worked, advocated for legislation making such distinctions, and provided the following five key EWA model elements he thinks legislators and regulators should consider to protect consumers: (1) funded by employers, (2) data accuracy in calculations, (3) transparent and capped fees, (4) payroll deduction of transactions, and (5) instant funding to the employee’s account of choice.
Enhancing employee financial wellness
Employers can enhance employee financial wellness by offering EWA as part of a comprehensive financial wellness program. Integrating EWA with employer’s payroll systems ensures real-time access to accurate earned wage data, which can assist employees in managing their finances effectively while avoiding debt traps like payday loans.
“We view on-demand pay as kind of a stepping stone or a lifesaver for these employees,” Dombroski started. “Unfortunately, two-thirds of our workforce live paycheck to paycheck and a small bump in the road becomes a big financial problem and then a big stress problem.”
He explained that financial wellness tools and budgeting resources are often embedded within EWA offerings, as employees become more receptive to these once their immediate financial stress is alleviated.
For employee retention, Morris thinks it is critical to provide a progression from EWA to other financial wellness tools and resources so workers can improve their financial situation. A 2022 report by Bank of America revealed that 84% of employers say offering financial wellness tools can help reduce employee attrition and 81% say wellness tools help attract higher quality employees.
Implementing best practices
To effectively implement on-demand pay and EWA, both Dombroski and Morris believe transparency is key. Employers should be upfront about any associated fees and make the access process straightforward.
Both also think that providing educational resources about the benefits and responsible use of EWA, and creating user-friendly platforms, are essential steps toward boosting adoption and user trust. By adhering to these points, payroll professionals can strategically navigate the complexities and leverage the benefits of on-demand pay systems, thus innovating payroll practices and enhancing the financial wellbeing of their workforce.
