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On-demand pay - The innovation in payroll

What is On-Demand Pay?

On-demand pay is a method of paying employees, where they receive their wages as they earn them. On-demand pay ensures that the employees are paid their wages before the next scheduled payday. It enables employees to receive either one day’s pay or the accumulated dues of their earnings thus far.

Technology makes it possible to provide employees with on-demand pay. The money owed to the employees (also called their ‘pay balance’) is directly delivered to them the day it is earned. On-demand pay is driven by the motivation to shield employees from financial stress - leading to happier, more productive, and better-engaged employees. 

Why is On-Demand Gaining Popularity?

The rising living expenses, the high cost of healthcare, and having to cater to unforeseen contingencies make managing personal finances a daunting challenge.

Despite the many innovations in various work processes and the digitization of payroll, the underlying philosophy of payroll has remained essentially unchanged and archaic. Most firms pay their employees on a weekly/fortnightly/monthly basis.

Typically, firms do not compute payroll in real-time. Payroll software now enables firms and payroll providers to compute the pay an employee is owed, after-tax, every day in real-time. This payment is credited to the employee’s bank account or payment card. Some providers charge a meager fee (typically equal to an ATM fee) for providing on-demand pay.

On-demand pay provides employees the flexibility to decide when and how they want to get paid. In addition, this facility benefits lower-income employees as it provides quicker access to their earnings.

How Does On-Demand Pay Benefit Employers?

On-demand pay benefits both - the employers and the employees:

  • Enhanced Productivity. Enhances peace of mind for employees over their finances. Financial wellness improves productivity, lowers costs, and positively impacts the business’s bottom line.
  • Competitive Advantage for Recruiting Talent. On-demand pay gives businesses a competitive advantage in the tussle for the best talent. Often, employees prefer on-demand pay over higher pay.
  • Employee Retention. On-demand pay is a significant motivation for employees to join and remain with an organization. In addition, the cost of on-demand pay is negligible compared to managing employee turnover. 
  • Enhanced Choice. Employees have greater flexibility/choice in deciding when they receive their pay and the mode of the payment. 
  • Ease of Access. Increased frequency of pay disbursal enhances a sense of financial security through quicker and regular access to funds.

The Unseen Drawbacks of On-Demand Pay

On-demand pay is not without its downsides. The drawbacks of on-demand pay include:

For employees For employers
Fees - Employees may resent having to pay a fee for receiving on-demand the wages they have earned. In instances where the on-demand pay is used to cover some emergency, paying a fee will feel especially irksome. Computational Errors - Although payroll automation has minimized the probability of computational errors, frequent payments increase the likelihood, howsoever slightly, of errors occurring while calculating wages.

Taxes - Typically, on-demand pay services do not deduct tax on employee withdrawals. However, since withdrawals are not tax-free, the employer deducts the taxes due from the next paycheck. Therefore, the employee receives a lower-than-anticipated paycheck, leading to frustration and resentment.

Taxes - Employers are responsible for tax deductions on on-demand wages. Failure to do so would attract penalties from tax authorities.


Preparing for Disbursing On-Demand Pay

On-demand pay as a necessary solution for improving the employee experience at the workplace is gaining greater acceptance among payroll professionals.

However, on-demand pay implies that payroll professionals must assume responsibility for the following challenges connected with compliance and processing:

  1. On-demand pay triggers the principle of constructive payment. The employer is responsible for the corresponding tax liabilities and reporting requirements. Compliance is an added responsibility that the payroll professionals/employers must bear with no clear guidance on on-demand pay from regulatory authorities.
  2. Handling wage garnishments is another compliance requirement related to on-demand pay. Payroll professionals integrate the garnishments process with workforce management tools to account for garnishments.
  3. Time-card approval is another challenge that on-demand pay presents. Managers usually approve hours once in a pay period. However, if the hours have not been approved before on-demand pay becomes due - payroll professionals use the scheduled hours defined in the payroll system to credit employees’ pay. Payroll vendors have dedicated customer service reps who contact the firm’s managers to obtain time-card approval before crediting on-demand pay.

Final Thoughts

Leveraging technology makes it possible to pay employees when and how they need it. As a result, on-demand pay has the potential to be the next big workplace innovation and a source of competitive differentiation.

On-demand pay can be topped up with many financial wellness tools such as savings options, bill payments, retirement planning, etc. If the potential of on-demand pay is fully exploited, it can reach levels of adoption equalling credit cards and exceeding overdrafts.

Interested to learn how you can offer a top-of-the-line on-demand pay service to your employees? Please reach out to us here.

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