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Earnings on Demand – Financial empowerment or just another payday loan?

‘On Demand’ is becoming the expectation for so many areas of our lives – from TV (where I can binge watch entire seasons rather than waiting for a weekly episode), an order from my local restaurant who use Uber Eats or my local corner shop which now offers a free delivery service – pretty much every area of our life is becoming more accessible and super fast. Think how annoyed we now get when we are watching a ‘live’ tv programme and can’t fast forward the adverts.

The area where ‘on demand’ hasn’t always been readily available is with our pay through payroll. Be it weekly wages or monthly salaries, 4 weekly or bi weekly we are used to having a fixed time when we will be paid and we usually know roughly how much. For most people this means we allocate certain payments to certain dates in the month e.g. my Mortgage payment on the 1st of the month.

There are now many providers who offer pay on demand integrations with payroll (or as part of the core product) so that employees can choose as and when they ‘drawn down’ their earned pay to date. This means the employee is more in control of how much of their net pay they get and when.

My immediate thought about this is – wow! It would be amazing to put that power in the hands of employees, especially those who are more flexible in their working hours or who are involved in the ‘gig economy’. But – the more I think about it the more I have some concerns about how it would actually work in practice, and in particular about financial wellbeing of employees.

Initially thinking about the payroll implications of this was how would the FPS work, how is tax and NI apportioned across the month and what happens with DEO’s etc. Now I have assurance that these have all been considered in the payroll applications.

A number of the providers talk about ‘income bumps’ and the fact that ‘this is not a loan’ but I do wonder about the old ‘robbing Peter to pay Paul’ syndrome. If I am an employee on a fixed monthly salary and I draw down 20% of my salary early due to an unforeseen expense, when I am paid in the normal pay cycle for the other 80% of my pay am I financially sound enough to be able to cope without the extra 20%?

There are other things that happen in payroll – what if I reduce my hours, become unwell or have a tax code notification later in the month than I have drawn down my salary.

The business cashflow also had me a little concerned – if I have 2000 employees drawing down salary throughout the month rather than in one large instalment what happens to the pay? Again – providers to the rescue on this one – many providers fund the withdrawals throughout the month, and then the business reimburses the provider in line with the normal pay cycle – and the employee pays a small admin fee for the processing of the payment.
There are many ‘caps’ or rules that can also be put in place in most of the solutions I have seen, for example not allowing employees to make more than 3 withdrawals in any pay cycle, or not allowing employees to have more than x% of their pay before the normal pay day.

The resounding concern is still one of financial wellbeing and how to educate employees on the way they spend and utilise their salaries. Financial wellbeing and tools which support employees to budget and save are massively underrated in terms of employee benefits and this is something I would hope all employers would consider when implementing a ‘pay on demand’ solution.

I did a mini survey of the Phase 3 team – perhaps we are more traditional in our payroll thought processes but without exception every member of the team said they would prefer the one payday and a weekly payment run for expenses (which is how we handle things now). The ‘out of pocket’ expenses was an important revelation for us in particular as with many of us travelling to client sites (under normal circumstances) employees were holding potentially hundreds if not thousands of pounds in out of pocket expenses and carrying these forward a month in arrears to be reimbursed.

I do feel however that for those employees who work irregularly for a business or are ‘truly casual’ this kind of solution is really beneficial – I also think it helps promote the casual status of an employee in that you are being paid as you work rather than with the rest of the employees on the monthly payroll run.

I’m interested to know others thoughts on this topic – clearly payroll of the future will demand more and more from solutions and the professionals behind them.

This blog feature was written by James Proctor, Director of Consulting & Services at Phase 3.

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