Three Approaches to an On-Demand Pay Provider Model
The pros, the cons and deciding which on-demand pay model is for you.
Similar to other on-demand services (think: rideshare, grocery delivery) where you can reap the benefit as soon as you place an ‘order’, on-demand pay works by enabling employees to access earned pay, without having to wait until a traditional payday. It’s typically offered as a voluntary benefit (and, one made even better by putting no financial liability on the employers’ payroll systems).
As with most financial benefit programs, there are a lot of factors you need to consider before implementing company-wide — especially compliance regulations. When taking the first steps towards an on-demand pay benefit, there are typically three main frameworks to consider:
- Employer-funded
- Wage deduction and debiting
- Integrated payroll
The Employer-Funded Model
Pros: Some on-demand pay vendors require the employer funds employee early transfers. This model isn’t much different than your company running payroll daily. You’re responsible for funding payments and updating paystubs and other records. Meaning, less adjustments from your known, established processes.
Cons: In this model, more work is required from your payroll team because they’re simply funding payroll early. In addition, you need to have sufficient funds set aside for your on-demand pay vendor to draw from to meet the demand for employee transfers during each pay period. Tax authorities also hold you responsible for making tax withholdings on partial payments as they’re made.
Wage Deduction & Debiting Models
Pros (wage deduction): In the wage deduction model, on-demand pay providers invoice your company for all transfers taken within the pay period, and then you must deduct any transfer amounts from the employee’s paycheck. The upside? In our opinion, not much.
Cons (wage deduction): This approach results in modifications made to the employee’s pay stub, which can be construed as wage theft, a practice that’s illegal or restricted in 23 states. Therefore, this model is neither paystub nor wage law compliant.
Pros (debiting): Also known as the “payday lender” model, the debiting model is often used by on-demand pay vendors in states where the deduction model can’t be used. In this model, the vendor debits the employee’s bank account on payday to recoup any early transfers taken during the pay period.
Cons: (debiting): This can lead to non-sufficient funds fees and confusion for the employee. This model also creates reputational and regulatory risk for your company.
Both of these models can create additional work for your payroll team if employee wage disputes arise on payday.
The Integrated Payroll Model
Pros: An on-demand pay provider funds all employee transfers and is paid back through your normal payroll process. You run and remit payroll as you always have, and there’s no requirement to set aside payroll funds because the provider handles all employee early pay requests.
This is the approach used by high-quality, reputable on-demand pay providers, like DailyPay, one of TEAM Software’s strategic partners for on-demand pay. Other benefits it offers includes:
- Employees receive up to 100% of their payroll on payday into their designated account.
- Employees can have their funds deposited into any account of their choosing — bank account, debit card, paycard or pre-paid card. (Some on-demand pay vendors require that you use their paycard or their payroll system if you want to offer on-demand pay.)
- When using an on-demand pay provider like DailyPay, their expert team manages compliance with regulations and upholding security standards (removing the liability from your team).
Cons: In our opinion? Again, not much. This type of approach isn’t for companies who want to shoulder liability 100% internally, or not look towards expanded employee benefits. Realistically, though, there are possible benefits for any company to take advantage of.
On-demand pay has been proven to reduce turnover, saving companies potentially millions of dollars in turnover costs. DailyPay’s research shows that companies typically see up to a 70% reduction in turnover and twice as many candidates for open positions because this is a benefit that employees want and need.
Learn more about how early wage access programs can help improve retention and reduce turnover.
DailyPay is TEAM Software’s preferred partner and leader in the North American on-demand pay provider marketplace. With a fortress balance sheet that’s able to meet the transfer demands of employees in all of our client companies. With deep experience serving large enterprise organizations, including Kroger, Adecco and Lidl, DailyPay is highly favored by Fortune 100 companies. In addition, companies who use DailyPay typically see a 35% adoption rate, which is two-three times higher than other on-demand pay solutions, according to DailyPay research.