Offering an array of fringe benefits is one way for a business to stand out above the competition. With many businesses looking to hire, finding ways to attract and retain top talent remains a priority. One thing that a business could decide to offer its’ employees is what is known as on demand pay. Let’s take a look at what on demand pay is.
What is on demand pay?
On demand pay, also known as earned wage access, allows employees to access some or all of their wages at any time. Instead of waiting for their paycheck weekly, biweekly, or however frequently their employer pays them, employees can access their earned wages beforehand. This gives the employees more flexibility with their income and can have access to their earned wages when they need them.
How does on demand pay work?
To receive access to their pay, employees can request a portion, or all, of their earned wages before payday. Often times, the request can be made by the employee through payroll software and approved or denied by the employer. This service does typically come with a fee that the employer or employee must pay. There is no obligation to on demand pay. This means that not all employees have to use this feature, or that on demand pay can be used one pay cycle but not the next.
As with regular wages, on demand pay is subject to state and federal payroll taxes. Often, the wages that are taken by the employee early do not have taxes withheld. This means the taxes must be withheld on the remaining wages paid out on payday. Consequently, an employee paycheck may be lower on payday than anticipated.
On demand pay does come with some compliance challenges for employers. Depending on how the fees associated with on demand pay are dealt with, there are different laws that need to be followed.
- When some, or all, of the cost is passed to the employee, employers must provide certain disclosures on the associated fees and allow employees to rescind payouts within a designated time frame under the Truth in Lending Act.
- When all of the cost is covered by the employer, the program may be considered a “Covered EWA Program” and is exempt from Truth in Lending Act requirements under a Consumer Financial Protection Bureau (CFPB) ruling.
Pros and cons of this type of pay
For employers and employees, there are pros and cons to on demand pay.
Employees that have access to on demand pay have a financial security blanket. If an employee needs money right away, they can often receive a same day on demand payment from their earned wages.
However, accessing funds early can come with fees that must be paid by the employee. Additionally, the remaining wages to be paid out on payday are often much lower than what an employee anticipates due to the taxes that must be accounted for on the on demand wages.
Employers can benefit from on demand pay, as this is considered a benefit to employees. Recruiting and employee retention rates increase with the more benefits a company offers. Employers can see an increase in work productivity when their workforce is happy and engaged in their company.
Finally, the downside to on demand pay for employers is the tax and pay errors that could occur. Tracking on demand pay can be difficult. Therefore, outsourcing your payroll needs to a vendor that can track employee wages and taxes is key.