HR 2025

HR 2025 Series: On-demand payroll is happening

More and more employees, especially gig and independent workers say they would like to have on-demand payroll. By 2025, we will have entered a new era for employee pay. Like their gig worker counterparts, employees no longer need to wait an entire month, half a month, fortnightly, or weekly to get access to their earnings. It is a future that is full of paydays.

We’re entering a new era for employee pay

Having done payroll and being an observer of the practice it’s clear that a major change is underway. This is the biggest transformative change in payroll I’ve witnessed to date.

In addition to ensuring employees get their earnings, payroll’s general role is to withhold tax at source and also arrange other contributions such as health premiums, retirement contributions, child support and myriad of other mostly voluntary deductions from pay.

This process is layered with jurisdictional requirements that can vary. The employer is not only liable for paying employees on time and correctly, but also adhering to requirements surrounding these deductions.

Contrast this with the payments made to workers who are not employees, like contractors. Payments for these worker’s services, also now including “gig” workers, generally are gross amounts for their work. Similar to what an employee would get without all those deductions.

For practical purposes, the “payers” of contract workers are not considered employers. They generally have no obligations with regard to accounting for all those deductions listed. The workers must personally deal with taxes and getting benefits.

They are not nearly as effective at doing that as if they were paid by employers. But for the payer, this administration is extremely straightforward and generally avoids a lot of liability that employers must bear.

I expect the controversy surrounding worker classification, or what constitutes dependent or independent services, to continue well into 2025. However, this is separate from the sea change occurring in the manner and timing of worker payments.

Advances in payments technology for gig workers have sprung a host of initiatives. These are now are transforming the manner and frequency of employee pay. How is this coming about?

Pressure for change

Currently, many gig workers can choose to get paid for their services almost instantly through an application on their mobile devices. Their employee counterparts, on the other hand, generally must wait until the scheduled pay date for their earnings. Pressure to change this status quo is coming from both employees and employers.

Employees are seeing this (and maybe experiencing it in their side gigs) and are asking: Why do I have to wait for my monthly, semi-monthly, biweekly or weekly pay cycle to get paid what I have earned? Nearly three-quarters of employees responding to a recent Harris Poll, commissioned by The Workforce Institute at Kronos, said that they desire the ability to access their earned pay before the scheduled payday.

Employers are seeing this as well. Many, especially those having difficulty recruiting and retaining workers, are searching for ways to provide, a daily pay benefit, or on-demand access before the scheduled payday.

On-demand payroll solutions available

The desire to offer a daily pay benefit is present and growing. However, with all of the complexities associated with paying employees, to upgrade and modify payroll systems can be burdensome and expensive. But, by leveraging the gig worker model for instant payments, there now is a spectrum of outsourced solutions. These can extend daily pay benefit, or on-demand payroll, to employees.

DailyPay, for example, works parallel to the payroll process. There is minimal interference to general payroll operations, it tracks earnings and accounts for deductions through the pay cycle. Amount of pay earned is available on a mobile device application. Employers continue to meet full pay cycle payment and deduction obligations on the scheduled payday.

Employers now offering some version of on-demand payroll are reporting dramatic increases in employee retention. They also are seeing competitive recruitment advantages in an economy where staffing up can be difficult. They report higher employee engagement, and the mobile apps now help employees’ financial wellness.

Generally, there is little cost to employers for implementing, and employees pay small fees for accessing amounts (which employers can reimburse, if they like).

Employees, in return, can draw on amounts earned during the pay cycle if they need to and also gain a financial awareness that was previously unavailable. They can see their earnings each day grow as they check what’s available. Before they could only guess at amounts mid-cycle.

Those with on-demand access are ensuring their reported time worked is up-to-date. This is so the app has an accurate reflection of what they have earned. This focus on accuracy helps the payroll process.

On-demand payroll: Removing the need for payday loans

As a result, employees with unexpected costs are becoming less reliant on payday loans and the difficult-to-break cycles of debt associated with the practice.  Those using the daily pay benefit have reported reduced financial stress that comes with living from payday to payday — stress that studies have shown impact work performance.

Further, as employers embrace implementing employee experience programs to facilitate high engagement from staff, on-demand pay is an important cog of that experience.

The daily pay benefit will expand to other aspects of the pay experience for employees. On-demand payroll solutions empower employees to control the timing and ways they use their earned wages, not only to pay unexpected bills, but also to save money early, to invest it, and even using features of the app to rebuild their credit score and more.

According to the Harris Poll, as of October 2019, only 6% of employees responding had access to on-demand payroll. While 72% said they would like to have such access. The potential growth curve is large, and the factors inhibiting adoption are diminishing.

This means by 2025, we will have entered a new era for employee pay. Like their gig worker counterparts, employees no longer need to wait an entire month, half a month, fortnightly, or weekly to get access to their earnings. It is a future that is full of paydays.

Michael Baer is a specialist payroll advisor at Dailypay.