What are the pros and cons of earned wage access?

Companies everywhere are in need of more employees to meet growing consumer demand. In an effort to lure in the best talent available, these businesses are beginning to adopt non-traditional methods of payment that equip workers with greater financial flexibility, a major one being earned wage access (EWA). Modern companies are now embracing this new payroll benefit like never before, as research indicates that workers want to be paid more frequently than ever before.

What are the pros and cons of EWA, and is it worthwhile for your company to adopt this new method of compensating employees? Let’s dig into it.

The basics of earned wage access

Earned wage access involves embracing a digital system that makes payment available to employees as soon as it’s been earned (or close to it). This means that an employee who has just worked 8 hours can immediately cash out and enjoy their paycheque as early as at the end of their shift. While instantly paying workers was once viewed as ineffective or costly, modern technology has made it easier than ever to integrate EWA to a company’s payroll.

Research indicates that the workers themselves are eager to get paid more often. When employees are paid infrequently, it’s likelier that bills begin to pile up and mental health issues arise from financial stress. In one survey, 34% of workers said they’d lost sleep because their money ran short before payday. An additional 33% claimed they struggled to pay for groceries, with 31% reporting they had to pay late fees because they were strapped for cash.

EWA seeks to circumvent this problem by making money more available to workers once they’ve earned it. But let’s get one thing clear: This system is not an advance or a loan. Workers are merely cashing out the money they’ve already earned, rather than receiving next week’s pay before they clock in the hours.

It’s thus easy to see that EWA systems bolster workplace morale and ensure the workforce isn’t financially strained by making payday available whenever employees need money.

How EWA works

Most EWA systems depend on smartphone apps, which allow workers to cash out the minute their shifts have ended. There are different app developers currently racing to perfect the EWA model; they’re riding the coattails of popular apps like Venmo and PayPal, which have raised user expectations when it comes to getting paid regularly and quickly. Most of these apps will charge a small fee during every withdrawal, though terms will vary depending on which service a company adopts.

In Canada, we have KOHO’s very own Instant Pay. It’s a B2B payroll solution that helps employers empower their employees with daily access to their daily earned wages. It’s completely fee-free and hassle-free for the employer, as KOHO handles all Instant Pay implementations and support. There will always be a free option for the employee as well.

With the emergence of EWA programs, we’ve seen some specialty models that offer various payment systems, such as:

• Direct-to-consumer model - Offers micro-loans to employees that are repaid whenever a scheduled payday arrives. These models often circumvent companies entirely, function similarly to loans, and are voluntarily used by workers who need more money immediately.

• Employer benefit model - Allows workers to receive both their earned wages and an advance from their company. The money for the advance comes from the instant wage pay app developer, which is subsequently paid back by the company on payday.

• Self-Hosted advance model - Does not require an app at all. Instead, a company internally provides an employee with wage assistance whenever it’s requested. This model is complicated, entails a great deal of administrative work on the part of the company, and is fading in popularity now that apps make it easier and more secure to outsource EWA systems.

The benefits of earned wage access

Making money more available to workers generates serious benefits for employees and employers alike. With over 50% of Canada living paycheque to paycheque, EWA can alleviate workers of the stress associated with bills, groceries, and other financial needs. This in turn leads to a more productive workplace populated by a healthy workforce that isn’t distracted by preventable financial concerns.

EWA also has the potential to reduce employee churn rate. When employees don’t have instant access to their earned wages, they’re more likely to fall behind on bills. This may lead them to take a second job, which could cut back on their availability or lead to physical exhaustion. The employer is then left high and dry when they need that worker during a period of high consumer demand. By making wages more accessible, employers ensure their workers don’t have to seek additional work elsewhere to make ends meet.

This model is also preferable when it comes to responding to personal emergencies. Workers who are grappling with the unexpected loss of a loved one or sudden damage to their homes or automobiles will need more money than usual. EWA ensures they possess the liquidity needed to navigate a personal crisis. With money safely in hand, they’ll be able to manage their finances regardless of whatever uncertainty arises.

The drawbacks of earned wage access

There are some difficulties and drawbacks associated with EWA systems. For example, they may have steep fees whenever a worker withdraws their money (not KOHO, though!). This means that workers will be forced to calculate whether an early withdrawal is truly in their financial interests. Figuring out how fees and interest rates are calculated can be difficult for some workers to wrap their heads around.

Certain states, provinces, or countries also have laws that can make the adoption of EWA systems difficult or costly. In California, for instance, there are strict rules about unfairly garnishing employee wages. In Canada, the regulatory environment hasn’t yet matured when it comes to EWA, meaning businesses may be operating without legal guidance. Companies need to do their research to ensure the EWA systems they adopt are legally and ethically compliant to avoid costly headaches down the line.

EWA systems may also require sensitive financial data which may be improperly safeguarded by app developers. Having employee data leaked is a nightmare scenario for most companies. Before adopting any instant wage system, carefully evaluate what data is being collected and how it’s being guarded before entrusting employee information to a third party.

With KOHO’s Instant Pay, you can rest assured your business’ and employer’s financial data is safe. After all, we work with federally regulated financial institutions to uphold the highest security standards.

Successfully adopting earned wage access

Always review all available options before making a final decision on which EWA provider you intend to work with. Take some time to ensure your workforce is familiar with the benefits of saving money now that they have more cash in hand, too. Allowing employees to access the money they’ve already earned will grant them the flexibility they need to manage their personal responsibilities alongside their work duties. Before long, you’ll find that the successful adoption of EWA leads to a more motivated and financially successful workforce.