What is On Demand Pay? Meaning and Common Challenges

With 30% of Americans living paycheck to paycheck as of 2024, having access to a percent of their paycheck is starting to look like a good deal, especially since a surprising number of the populace had to resort to payday loans to make ends meet.

That’s where on-demand pay can become an effective solution. But what exactly does it mean, and how can it help you manage your finances?

In this article, we’re discussing everything about it, how it works, how it helps create a better cash flow to create better financial instability, and some of its pros and cons.

What is on-demand pay?

Earned Wage Access (EWA), Instant Pay, or simply on-demand pay refers to letting an employee withdraw a percentage of what they will be earning before their paycheck, either manually or through a third-party application. Think of it as a system that allows for earlier pay access.

This percentage will need to be pre-approved by the manager first. It will be deducted from the next paycheck and is usually capped at a certain percentage, which varies from one company to another.

Since it requires a company to pay their employees before their designated payday, having a solid salary structure already in place is a must beforehand.

How does on-demand pay work?

An employer signs up for a program that gives employees an opportunity to sign up for an advance on their earned wages for the month. The request is then forwarded to the higher-ups in charge, who will then approve the employees' on-demand pay request before the regularly scheduled payday.

The employee does not just come up with a random number with their on-demand wage. The company will need to calculate how many hours they have worked for that certain pay cycle and subtract that from their next paycheck.

For example, a fast-food worker will ask for their wage on-demand after two weeks of working. They will need to dictate how many days they’ve worked within the pay cycle, which will then be automatically computed via a dedicated platform, or manually.

Deductibles like taxes, insurance, student loans, and the likes are factored, which will be subtracted from the total before being sent to the employees’ bank accounts afterwards.

The rest of the salary will then be forwarded to the employee on payday, with the payment already deducted. Keep in mind that not all companies offer the service, especially in more populated states. However, most big fast-food companies, like Burger King, offer it to their employees.

Benefits of on-demand pay

The system provides so much more than just monetary value to the employees – as both employers and employees alike can see the benefits for themselves.

Better employee retention

Four out of five employers have reported that not only does having an on-demand payment scheme alleviate their employees’ financial burdens, but it also helps them retain their employees better in the long run. Happier employees result in better employee retention, which can then result in a better company image. A study has also found out that companies offering it see 96% more applicants.

With better employee retention also comes more productive employees. Since existing employees can get more control over their money before their regular payroll cycle, financial stress and worries can be put aside and promote productivity.

Provides better cash flow for employees

Since the employee can acquire their currently earned wage before their designated payday, it creates better financial stability in the long run. Not only that, but employees can also enjoy better cash flow thanks to earlier access to their salary. The almost instant access to their pay also can help them with unexpected expenses in the long run.

This also means better financial security for the employees, as they no longer must take out payday loans to try and make ends meet before their big paycheck comes through the mail.

Common challenges of on-demand pay

However, the service also comes with its own glaring flaws, ranging from problems with state regulations to tax issues.

Varies from state to state

Although states like Nevada and Missouri – with Wisconsin following a year later - have already created bills that mandate Earned Wage Access for their workforce, some states like California and New York still have not made the transition. This means that some companies based on said states may or may not provide one for their employees.

If your employer happens to implement it in the latter states, then they might also face tax consequences as well. This is because they are receiving credit for obtaining income while still not physically getting it themselves, which can be taxable due to constructive being a constructive receipt.

Additionally, since it's still relatively new even to Nevada and Missouri, the Federal Government is still looking for ways to prevent employers and third parties from taxing employee withdrawals via transaction fees or fines.

Long adjustment period

Since it requires a complete overhaul of a company’s payroll process, the adjustment period to the new system will inevitably be long. It can get especially long if the company isn’t flexible enough to have an variable pay program already in place.

To add, having the system also requires a company to pay their employees before their designated pay period. This can then make cash flow tricky to handle if management is not prepared.

Requires a new payroll processing software

Speaking of payroll providers, having the system also requires using different payroll services compared to the more traditional ones that most companies use. Payroll provider charges, transaction fees, and staffing costs should also be considered before shifting to the on demand pay option, especially when it comes to employers.

Getting a consultant to look over your company’s current payroll service is a good call to streamline the process further. Depending on the consultant, you can even alleviate the need to get new payroll processing software altogether and update the current one the company is using to adapt to the method.

FAQs

Here are some frequently asked questions about the topic.

What is an example of on-demand pay?

Take Burger King as an example. Their employees will log in to either the designated mobile app or online platform and make a request for a portion of their salary there. Once either a supervisor or a higher up approves, the said portion of their salary will then be forwarded to their bank account before their designated payroll schedule.

The pay on demand will then be subtracted from their next pay schedule. Depending on the state, their taxes will then be deducted on the payment on-demand or on their next paycheck.

Is on-demand pay worth it?

Yes, it is worth it, especially for employees living from paycheck to paycheck. It can help them plan their finances better and alleviate financial stress. Employees can then use this pay as they want to - whether it's to pay ATM fees or to help them with unexpected expenses.

Does “on-demand” mean pay?

Yes, “on-demand” means that a part of their salary will be paid to the employee after they demand it.

How long does on-demand pay take?

It varies from one company to another, but it will usually take from a couple of minutes to a few business days depending on your company’s current payroll program. Do take note that certain factors, like an employer poli cy, banking institutions, and the like can delay the process further.