Benefits and Compensation

On-Demand Pay Considerations

Has your organization started offering on-demand pay as an employee benefit? On-demand pay is exactly what it sounds like—a way for employers to give employees access to their pay on demand instead of waiting for the standard payday. On-demand pay is often implemented through a third-party app, coordinated by a payroll provider, to give employees early access to their wages.

To learn more about on-demand pay and how it helps employees and employers, check out this article.

If this is something your organization is considering, here are a few things to think about before getting started:

  • Set parameters and rules for employees, such as the allowed frequency of withdrawals before the regular payday. For example, these parameters could permit a specific number of transactions in each pay period, per day, or per week.
  • There will be fees involved, so the employer will need to decide and communicate who will be responsible for those fees. For example, the employer may opt to cover the fees for the first on-demand pay withdrawal within a pay period but allow the employee to make additional withdrawals if he or she is willing to pay the subsequent associated fees. Alternatively, employees could opt for varying fees depending on how quickly the money is available. However, this should be discussed up front because the fees will impact how easily employees can utilize this benefit and how useful it is for them. (Note: Fees may also vary depending on how the program is set up.)
  • Allowing early access to pay does not negate an employer’s obligations regarding pay deductions and garnishments. There will need to be robust accounting controls to ensure that after all deductions and garnishments, only the net pay is available for early withdrawal.
  • Laws differ in different states and local jurisdictions in terms of what an employer can and cannot do with employee pay. Employers offering on-demand pay options will need to be cautious with any offerings to ensure they’re still legally compliant at the local level. This is applicable for any paycheck but is especially relevant for final paychecks, which frequently have special considerations in the eyes of the law. Also, whether a pay advance is considered a wage “assignment” or “deduction” also varies from jurisdiction to jurisdiction—and both come with their own legal considerations. This is something that may be different in each location, which means employers with multiple locations may have a lot of varying legal restrictions.
  • Employers using a third party for this benefit must be aware that sensitive employee personal data will be in the hands of the external organization. So, employee concerns will need to be managed. Security is a prime consideration when choosing an on-demand pay provider. Employers must be able to explain what information the third party has access to, as well as what information is transferred back to the employer regarding employee use of the benefit.
  • In many cases, prepaying wages still requires employees’ advance authorization to make additional deductions from their paycheck. This is another factor that will vary legally from one area to the next.
  • Employers can choose to set parameters for on-demand withdrawals, such as limiting the total percentage of take-home pay that can be requested early. These types of restrictions can help employers manage the program without it becoming problematic for employees who may accidentally withdraw more than intended and find themselves without much of a paycheck when the standard payday comes around.

Offering on-demand pay is something many employees can greatly benefit from. As such, employers should be aware of what they’ll need to get right when offering this benefit to ensure it is handled appropriately and within all legal requirements.

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments, including HR, sales, marketing, IT, commercial development, and training.