What Is Earned Wage Access? Learn How It Works and Why It's So Popular

According to Bankrate, 57% of Americans don’t feel they have enough money to fall back on and 36% have more credit card debt than emergency savings. This begs the question: How can you build a benefits program that better supports the needs of today’s workforce?

One program that stands out as a way to address financial strain is earned wage access, but other perks can help, too.

For many organizations, taking a more flexible approach to payroll has made a significant difference in their employees’ lives. Financial wellness benefits give people more breathing room and can be influential in retaining the talent your organization needs. And since personal finance issues can negatively impact sleep, mental wellness, and self-esteem—all factors that influence employee productivity and retention—going the extra mile can be well worth the effort in the end.

BambooHR makes implementing a centralized payroll system simple, cultivating easier paydays for everyone. In this article, we’ll explore on-demand pay and what to consider before choosing a service provider.

What Is On-Demand Pay?

On-demand pay, also called earned wage access (EWA) or instant payroll, is a financial benefit that connects employees with their money outside their scheduled payroll cycle. Instead of waiting for their weekly or bi-weekly pay to come through, they simply request some or all of the money they’ve earned and receive the rest in their regular paycheck on payday.

About 71% of middle-market businesses offer on-demand pay, but it may not be for everyone. Here are the pros and cons of an EWA program:

How On-Demand Pay Works

EWA programs are fairly straightforward. Here’s a general overview of how an on-demand payroll program typically works:

• A business partners with an EWA provider: The service provider pairs with your current payroll system and automatically tracks time, hourly pay rate, and attendance to yield an earned wage total.
• Employees enroll in the system: Eligible employees who want to participate can enroll in instant payroll and link their bank accounts.
• Funds gradually become accessible: Enrolled employees simply log into an app or self-service portal to see how much they’ve earned during the current pay period.
• Employees request instant payment: Upon request, funds transfer directly into their designated account.
• Business processes payroll: Payroll administrators take what the employee earned during the pay period, minus early withdrawals and other deductions, and pay out the balance as they normally would.

Limitations may apply, depending on the provider. For instance, some EWA programs limit the number of withdrawals employees can make per month or pay cycle.

Why Employees May Need to Get Paychecks Early

On-demand pay provides greater flexibility for full-time employees, gig workers, and independent contractors who sometimes need their money sooner than the average pay schedule allows. This could be for any number of reasons, such as:

• Emergency expenses: EWA can be a game changer when auto repairs, medical bills, costly household repairs, and other unplanned expenses pop up.
• Loss of income: If an employee’s partner is out of work, early paycheck access can help them make ends meet temporarily.
• Everyday payments: From credit cards to mortgage payments, on-demand pay helps prevent late fees and penalties that can add up to overwhelming debt.
• Overall financial strain: EWA programs lower the risk of people seeking payday loans, credit cards, and other high-interest options when they need money quickly.

However, offering flexible paydays isn’t the only way to support your employees—a well-balanced compensation strategy can bring peace of mind on several financial fronts and contribute to a smart recruiting strategy. Here are some other creative benefit ideas that can impact your employees’ financial wellbeing for the better:

• Financial literacy programs
• Student loan reimbursement
• Retirement plans
• Mental healthcare
• Family support options
• Remote work stipends

Paycheck Advance vs. Earned Wage Access: What's the Difference?

EWA programs are relatively new thanks to pioneering fintech technology, but payroll advances are established practice. While they require no credit check and share the same outcome, notable differences lie in the details. Two common methods include:

Employer-Sponsored Paycheck Advances

Paycheck advances are similar to short-term loans between an employee and employer. The employee requests the money, signs a repayment agreement, and pays off the balance through subsequent payroll deductions over a set period. The employer may also collect interest and administrative fees, adding to the total balance.

Payroll Advance Apps

Some employees seek paycheck advances through cash advance apps. Much like predatory payday loans, people can borrow money from the app as long as they agree to repay the balance (plus fees) the next time they get paid by their employer. For many people, it’s all too easy to repeat this solution and fall into an overwhelming debt cycle.

In contrast, on-demand pay isn’t a lump sum that must be repaid. It’s simply access to the wages an employee has already accrued during the payroll cycle.

10 Questions to Ask Earned Wage Access Providers

When evaluating providers who promise this feature, there’s a lot to consider. Here are some things to ask before signing up for a service:

1. Who funds the cash for an EWA program?

An EWA service provider may use their funds or request the employer provide the money in advance.

2. Do transaction fees apply to the employee or employer?

Employees may be responsible for some or all the fees. However, the employer may handle it themselves under a covered EWA plan.

3. How much can an employee withdraw per transaction?

EWA apps let employees withdraw different amounts. For instance, one service may allow employees to take up to 100% of their accrued earnings per pay period and another may only allow up to 50%.

4. How long do on-demand payments take to process?

Most EWA programs allow same-day transfers, while others may take a couple of business days to process. Getting this information upfront helps employees know what to expect.

5. How are taxes deducted from on-demand payments?

Most EWA platforms don’t tax EWA deposits, so you’ll need to handle that aspect when you run regular payroll. It’s important to figure out how this step works when you partner with a provider to avoid IRS penalties.

6. How are wages granted to employees?

In most cases, the money is directly deposited into an employee’s bank account. Some EWA service providers pay through a digital wallet, prepaid card, or cash app to serve unbanked employees.

7. Do earned wage access laws affect compliance?

As of 2023, official guidance is evolving. Some states like Missouri and Nevada have enacted EWA laws and others are discussing legislation. If your state does not currently have regulations, it may in the near future.

On the federal level, the Consumer Financial Protection Bureau (CFPB) issued guidance in the Truth in Lending Act (TILA) on whether on-demand payroll can be considered a form of credit. Per the advisory, certain programs cannot be considered credit as long as the program meets certain criteria.

It’s essential to work with a provider that’s up to date on the most recent legislation and can seamlessly implement changes as they arise.

8. How much is the per-transaction fee for on-demand payments?

Just like ATMs, per-transaction fees for on-demand payments vary. Business owners should inquire about this part of their agreements before enrolling to ensure their employees have the most current information.

9. How do EWA services integrate with my payroll provider?

First, you must find an EWA service that’s compatible—it’s typically an app that integrates with your HR or payroll platform. If your desired EWA service doesn’t work with your payroll provider, it may still be possible to partner with them directly.

10. How secure is your EWA platform?

EWA platforms boast robust security to protect your employees’ information, but sharing isn’t without risk. Be sure you’re working with a trusted provider that prioritizes safeguards for sensitive data.

Getting Paid Sooner with Early Direct Deposit

Today, many employees receive their paychecks on payday via direct deposit. And while it’s almost so ubiquitous that it doesn’t sound like much of a perk, some people can get their money up to two business days sooner with early direct deposit. A service offered by select banks and credit unions, early direct deposit makes it easier for people to pay their bills on time and manage unexpected expenses—similar to EWA programs.

When an employer processes payroll, the details are sent to the employee’s bank. Instead of waiting for the paycheck to clear and granting access to it on payday, the bank simply drops it into the employee’s account right away. This means someone who usually gets paid on a Friday every week will get paid on Wednesday. It’s also especially helpful if cash flow is tight and a regularly scheduled monthly payday falls on a weekend.

Of course, managing compensation each pay period can be a hassle-free experience with the right software, integrations, and compensation strategy in place. With BambooHR® Payroll, employees can easily view their pay stubs and even edit withholdings and direct deposit information under their profile, putting more control at their fingertips.