4 FAQs about daily pay programs

Payroll is the original benefit.

If you don’t believe me, just think about a world where you stopped paying your employees. You wouldn’t be able to recruit anyone (assuming you’re not a volunteer organization); your employees probably wouldn’t be particularly engaged (if they even stuck around); and not surprisingly, your turnover would be astronomically high.

As with all things, payroll continues to evolve over time (imagine the days before direct deposit!). and there is a new emerging benefits category that builds on this fundamental significance of payroll as an employee benefit. Heavyweight employers from Walmart to McDonald’s are now providing their employees the ability to control when they get paid, a so-called “daily pay benefit.” With a daily pay benefit, or “on-demand pay,” employees can access their earned/unpaid wages before payday so they can have money to pay bills on time and avoid late fees.

Not surprisingly, the emergence of this new benefits category brings with it new questions, feature choices, and decisions about how to best implement a daily pay benefit for your specific employee base. As I have spent time traveling the country speaking with benefits managers at best-in-class companies, it is clear that nearly everyone recognizes the need and understands the value in offering on-demand pay. But from these conversations, it is also clear that every company is different and that there are specific questions to answer for each program.

From my conversations, I’ve shared below the four most commonly asked questions I get asked when helping companies launch a daily pay benefit:

1. What’s to prevent my employees from spending all of their money before payday, leaving them worse off financially?

This is by far the most important aspect of implementation for a daily pay benefit. None of us want to put our employees in a position where they are even less financially secure come payday. But how do you balance offering this benefit for when an employee really needs it, versus encouraging irresponsible behavior?

The answer is to structure the daily pay benefit as a “needs-based” benefit. To help understand this point, we can look to health care as an analogy. Under most insurance plans, I can go to my doctor when I need to. In the same way, a daily pay benefit sits dormant until it is needed. If an employee happens to face an unexpected expense in the middle of the pay period, they have the full flexibility to access any portion of the accumulated earned/unpaid wages.

There are some daily pay programs that aren’t needs-based. They are designed so that the employee must transfer that day if they want that day’s wages. In this way, they resemble more of a “day laborer” pay schedule. Instead of lying dormant, these types of programs prompt the employee to transfer funds in a “use it or lose it” approach. These programs often result in the employee advancing their pay that day, even if they don’t need the money, due to fear of losing out on that day’s opportunity. Unfortunately, this leads to employees having nothing left on payday due to excessive transfers within the pay period. 2. Can I limit how an employee uses it?

Transparency and simplicity is paramount when it comes to anything having to do with benefits, and in particular, anything having to do with employee pay. The employee mindset here matters. For a daily pay benefit to be successful, the employee needs to understand that the money they are receiving is their money.

A few employers have asked me privately whether they should limit the amount available for early access to “protect the employee.” While this is certainly possible, limiting the available amount to a company-determined threshold—e.g. 50 percent—changes the employee’s mindset. Now the employee views the program more like a paycheck advance. Now the money she receives is not “her money” to be budgeted and used for long-term financial security but rather a paycheck advance against half of her earnings.

3. How do I roll this out?

For a benefits manager, your goal is to get the maximum amount of adoption from those interested in the benefit. That means rolling it out to everyone, regardless of socio-economic background. It is often the employee without the latest $1200 smartphone who is the most likely to need a daily pay benefit, and as such, it is important to make sure the benefit can be accessed not only through an app, but through a good ol’ fashioned computer or older model flip phone.

In addition, employees today are very particular about their banking choices. Following the recession, employees are mistrustful of certain financial institutions and so want the choice to receive their funds where they want. A successful daily pay program is one with which employees can receive their advances into their own bank accounts, their own paycard, or their own prepaid cash card. Forcing them to use one particular paycard is a non-starter.

4. How do I get my payroll team on board?

As Alice Gilman points out from the American Payroll Congress, “Don’t buy into on-demand pay until you have a good idea of how this will affect compliance with state and federal tax and wage payment laws.” When you bring up the idea of a daily pay benefit to your payroll team, there are three things they will absolutely require:

• Funding: Your payroll team is focused on ensuring the company does not fund employee advances. Funding employee advances creates an excessive burden on the payroll and treasury teams, both from an operational and funding perspective. Be sure to structure your program so that the vendor funds all employee advances.
• Tax withholdings: Your payroll team does not want to file daily tax withholding. To avoid that, select a daily pay vendor who funds all employee advances so that the company is not funding any advances and triggering tax withholding requirements.
• Compliance: Your payroll team does not want to be “cutting edge” as it relates to a novel interpretation of state wage-deduction laws. Make sure that the daily pay program is designed so that the employee still receives 100 percent of his or her net wages on payday, so there are no unintentional wage deductions committed by your company.

Launching a daily pay benefit is one of the most effective ways to increase employee retention and engagement. Like all programs, it requires you to do your diligence on what is best for your particular employee population.

 Jason Lee is founder and CEO of DailyPay.