What is earned wage access?

Earned Wage Access, or EWA for short, is an alternative to the traditional payroll infrastructure. It lets you cash out a percentage of your earnings earlier than you would if you were to stick with the two-week pay cycle. And it makes sense — if you worked today, shouldn’t you get paid today?

It seems more and more companies are catching on to this rationale, as they’re increasingly adopting the EWA benefit for their employees. But it’s not all unicorns and rainbows; EWA is somewhat controversial.

If your employer offers EWA, you may wonder whether you should use it or not. Or maybe you run a business and want to know if you should offer it to employees. So let’s review the pros and cons of EWA, and whether it’s right for you or your employers.

Understanding earned wage access

EWA also goes by several other names, including Early Pay Access, On-Demand Pay, or Daily Pay.

As mentioned, EWA gives workers access to some of the wages they already accrued before their pay period is over. This allows employees to get their pay when they need it, so they can pay their bills on time or have a financial cushion in case of emergencies.

This type of system is particularly popular among those who work hourly shifts or part-time jobs.

How employees access the earned wages

Every EWA system is slightly different. Some systems let employees use a mobile app to receive their wages, while others may require a desktop platform. They can also deliver the wages in several ways, like through direct deposits or prepaid cards.

How EWA works on payday

The current EWA programs all work in a similar way. Employees can withdraw their earned wages early throughout the pay period. On payday, the payroll system will automatically recollect the funds cashed out early, and deposit the remainder of their wages.

One important point is that the earned wages withdrawn early do not typically include an interest payment. This makes EWA very different from payday loans.

Earned wage access in Canada

EWA programs started appearing during the 2010s in the United States, so they are still relatively new. An EWA program allows employees to access a portion of their paycheque on a daily basis. This is particularly important for the over 50% of the nation who live paycheque to paycheque, and the many Canadians who resort to predatory payday loans just to cover their necessary expenses like bills and groceries.

Pros of earned wage access

Those in favor of earned wage access point out numerous benefits. Let’s explore the most prominent ones.

1. A zero-interest alternative to payday loans

Payday loans are very problematic, primarily because of their extremely high interest rates. The Canadian government estimates the effective interest rate on payday loans ranges from 500 to 600%. With these rates, they trap borrowers in a cycle of debt where they have to take out a new loan to pay off the high interest rate on the last one.

Both EWA and payday loans put cash in the employee’s pocket, then deduct it from their paycheque. The key difference is that EWA does not usually charge interest, making it the financially smarter and healthier alternative.

2. Your pay on your terms

With EWA, employees get the major benefit of being able to cash out funds when they need them. For everyday groceries or an expensive car repair, they no longer have to wait until the next payday.

3. Great for new employees

That ability for employees to access their funds when they need them is particularly important for new employees. With EWA, they wouldn’t have to wait until the end of the pay cycle to get their first paycheque. This is particularly important for people who have not had a job in a while.

4. High transparency

Because of their immediate nature, EWA programs are updated every single day, if not more often. This is necessary for employees to be able to withdraw funds based on their hours worked. At the same time, it lets employees easily see how much money they have available. It gives them more confidence and transparency in their funds.

5. Benefits for employers

Employers can use EWA as a selling point during recruitment. This can help them attract better talent. It can also improve employee retention, reducing costs for replacing and training new ones.

Perceived cons of earned wage access

While those who support EWA say that it offers an alternative to payday loans, some critics say that it is not much better. Although we don't agree and have written about which EWA misconceptions to avoid, here's what the critics have to say:

1. Employees can get trapped in a cycle

Even without the interest rates, critics argue that it is easy for employees to fall into a cycle where they rely on the advance from EWA. They also argue that early access to one’s paycheque could ruin their budget for the following pay period. They will have less than expected in that pay period and therefore need to access some pay early once again.

2. It could make budgeting harder

Critics also argue that EWA makes it harder for users to budget. This comes down to the fact that any funds accessed early get deducted from the paycheque on payday. As a result, critics believe the paycheque will be lower, and it may be harder to pay future bills. At the very least, someone who takes advantage of EWA will receive a slightly different amount every payday, which can make budgeting and financial planning challenging.

3. Some have fees

As mentioned, some EWA programs do not charge interest — the keyword being “some.” Some do charge interest, while others may charge other fees. The US EWA provider Earnin, for example, has faced criticism for its tipping model. Although it has since changed, at one point, Earnin limited the size of loans based on the tips users had paid.

Some estimates indicate that the fees from some providers can create an effective interest rate of 365% or more.

4. The ability to advance more than the paycheque

There have also been cases where people used EWA to receive more money than they would earn on their following paycheque, effectively forcing them into overdraft.

This also poses a risk for the EWA provider. They could potentially advance someone more than they will be able to pay back.

Of course, the risk of either of these scenarios happening is low. That is because the EWA system only advances funds for hours that were already worked. The programs will not offer advances based on planned hours.

5. Employers have upfront costs

There is also the fact that employers may have to pay to start using an EWA program. The employers will also have to spend time and money rearranging payroll and possibly finding a new solution that is compatible with their chosen EWA program.

That being said, employers can also pass most of the costs of the program onto the employees who take advantage of it. Of course, that only worsens the earlier concern about fees.

Wrapping it up

Some employers in Canada offer earned wage access via a third party or partnership. This lets you get an advance on your paycheque, based on hours that you have already worked. Essentially, you can get access to wages that you have already earned but are still part of the current pay cycle.

EWA gives you much more flexibility in terms of your finances and can provide a financial safety net. At the same time, you have to be cautious about any potential fees and changes to your budgeting. As long as you use a reputable platform and are aware of any fees, EWA can be incredibly useful.