A 2020 report by Ernst & Young says on-demand pay is “the term used to describe a category of financial products that give employees the ability to draw on their accrued wages before payday.”

The Case for On-Demand Pay

In 2017, CareerBuilder reported that a staggering 78% of U.S. workers live paycheck to paycheck. Since then, surveys from other sources have shown a decline in that number.

According to the 2019 “Getting Paid in America” survey, 74% of U.S. workers live paycheck to paycheck; in the 2020 survey, that figure dropped to 69%. And a 2020 survey by Highland Solutions found that 63% of U.S. workers have been living paycheck to paycheck since the COVID-19 pandemic started.

Despite the declining numbers, a significant portion of U.S. workers are experiencing financial stress. According to the Ernst & Young report, 70% of people in the U.S. and U.K. experience financial stress regularly, and half of them “have faced a financial shortfall between pay periods and encounter this issue approximately every four months.”

As Ernst & Young states, financial stress causes distractions, reduced productivity, absenteeism and employee turnover in the workplace. Notably, financial stress accounts for 20% of employee turnover, resulting in an estimated $300 billion in annual costs to U.S. and U.K. employers.

Ernst & Young asserts that financial stress arises from three main sources:

Emergencies.
Insufficient savings.
Disconnect between the timing of income and expenses.

To support employee financial well-being, employers are turning to on-demand pay.

On-Demand Pay Program Types

As stated, on-demand pay allows employees to access accrued wages prior to payday, meaning wages already earned but not yet paid. Employers can usually limit the amount and frequency of early wages withdrawn.

Employers that perform payroll in-house can offer on-demand pay by using payroll technology that integrates with the on-demand pay application.

Alternatively, employers can go through a third-party vendor that provides on-demand pay services or a payroll provider that includes on-demand pay in its services. Utilizing a third party is key to lowering many of the responsibilities that come with designing, implementing, administering and maintaining an on-demand pay program.

But before you adopt the program, be sure to consider all factors, including your legal obligations, any fees your employees will be responsible for and how to help your employees properly use the program.

Growth Outlook for On-Demand Pay

In the 2020 “Getting Paid in America” survey, nearly 28% of respondents said they are already using on-demand pay or want access to it.

According to a 2019 SHRM article, 5% of large companies with mostly hourly workers currently provide on-demand pay, and that number is forecast to jump 20% by 2023.

Last, and most striking, the Ernst & Young report says on-demand pay can reach levels of adoption similar to that of credit cards if its potential is fully realized.