What is Earned Wage Access?

Earned wage access. On-demand pay. Early wage access. You’ve probably heard one of these terms over the past few years – each of them is a different name for a solution that allows your employees to get access to a portion of their pay – their earned wages – right after they finish work. In this article, we’ll cover off some of the key points about earned wage access, and talk about some of the differences in the market today.

The Benefits of Earned Wage Access

So why even consider earned wage access for your organization and your employees?

Earned wage access offers a number of benefits for both employee and employer alike:

Employee Benefits:

At its core, earned wage access is meant to be a financial wellness benefit for employees, designed to help them ‘bridge the gap between workday and pay day’ or simply allow them to access a portion of their already-earned wages to do with them what they wish.

And by allowing employees to access their pay in between pay periods, they’re often able to quickly and easily make up for any unexpected budget shortfalls, and can buy groceries, put gas in their car and more.

It’s been proven that long term, an employee that’s financially better off ends up being a more productive and engaged employee as well. Consider that financial stress alone is reported to cost employers $2,169 per employee per year in productivity and absenteeism.1 If employees can’t perform their jobs or perform them well, they face disciplinary actions or risk being let go — which further compounds their financial difficulties.

Earned wage access plays a critical role in the overall wellbeing of employees, and should be considered by employers along the same lines as other employee benefit offerings.

Employer Benefits:

For organizations, earned wage access plays a critical role in impacting key HR metrics, such as recruitment, retention and turnover. At Instant, we have seen clients improve retention rates by upwards of 27%, which has a huge financial and cultural impact across the organization.

Not only that, but employees want to work for employers that offer them access to their pay each day. According to our 2022 Wages and Wellbeing Study, 79% of workers would be more interested in applying for a job that pays them the same day they work – which is 30% higher than in 2018.

And beyond these quantitative benefits above, allowing employees to access their earned wages is just the right thing to do.

The 3 Models

There are a number of methods by which vendors deliver earned wage access solutions to employees. 

Deduction Model

The Deduction Model of on-demand pay requires the employer to make payroll deductions in order to recover the earned wage advance. This use of payroll deduction is restricted in more than 14 states, thus exposing the employer to risk associated with state labor regulations. Because it changes the date that an employee has constructive receipt of wages, this model also creates tax withholding and reporting issues for the employer.

Wage Assignment or Intercept Model

The Wage Assignment Model of delivering on-demand pay requires participating employees to reroute the direct deposit of their wages to the earned wage access vendor, using the vendor’s pooled account, where wages are held. Because this process requires the employee to give control of all of their wages to the provider, it creates significant risk for workers. For this reason, wage assignment programs are prohibited or significantly restricted in multiple states, including Illinois, Maryland, New Jersey, New York, and Virginia. This model may also require the provider to obtain a money transmitter license in each state in which it operates.

Responsible Model

The Responsible Model of delivering on-demand pay, pioneered by Instant Financial, is the only solution that protects the employer from risk and does not require the implementation of payroll deductions or other process changes. The Instant Financial model gives the employee full control over how and when they receive their pay. Employees can access their earned pay when they choose and are never charged a fee for accessing a portion of their pay after they work.

Vendor Selection

When you’re finally ready to look at a vendor shortlist for your organization’s earned wage access offering, consider the following:

1. Implementation process: ensure your vendor offers up a clear and detailed process for implementation and roll out for maximum employee uptake
2. Compliance: ensure your vendor knows the complexities of labor and wage laws from state to state within the US
3. Fees: some vendors charge predatory fees for employees to access their wages, which we’d argue defeats the whole purpose of offering on-demand pay in the first place.

Conclusion

Earned wage access is an important benefit for organizations to offer their employees, as it helps with recruitment, retention and turnover, while also providing employees with a much-needed and expected safety net.

To learn more about Instant’s fee-free earned wage access solutions, get in touch with us.

1 “Lowering the Cost of Financial Stress to Employers and Its Impact on Workers.” Retirement.Johnhancock.Com, Nov. 24, 2020, www.retirement.johnhancock.com/us/en/ viewpoints/financial-wellness/lowering-the-cost-of-financial-stress-to-employers-andits-impac.