Exploring Payroll Advance: Pros and Cons for Employees
A detailed look at how payroll advance programs work their benefits, risks and impact on employees. Research-based insights, practical ideas and links to trusted sources.
For some employees, unexpected financial burdens can be even more stressful than work. Due to the due dates of bills, unexpected costs, and irregular pay cycles, it can become necessary to take out high-interest loans or skip payments. In the last ten years, one such solution has emerged: the payroll advance. Employers, even those using time tracking like OpenTimeClock, are beginning to understand how early wage access tools can positively affect financial wellness and employee retention.
The simplicity of the concept is misleading, as there are many mechanics, benefits, and risks to payroll advances. In some cases, they work like loans that the employer guarantees. In other cases, they are automated, tied to early wage access platforms that pay employees hourly. Employees must grasp the full picture of how these programs improve, or do not improve, their financial stability.
For a comprehensive, research-driven comparison of payroll advance programs and alternative forms of credit, see below.
What Is a Payroll Advance?
A payroll advance is when an employer lets an employee access their wages before their regular payday. This is something that employers have been doing for a long time. Since workers in the agriculture, mining, construction, and other shift-based industries worked in cycles and needed to cover their living expenses, employers would pay these workers in advance.
Now, payroll systems, time-tracking tools, and earned wage access (EWA) apps help digitally automate the advances. Employees can request their wages to be advanced based on hours worked with little to no manual paperwork.
Policies on payroll advances vary from employer to employer. Some employers will only let an employee collect a small advance. Other employers will allow the employee to withdrawal a certain percentage of wages that have already been earned.
How Payroll Advance Differs From Earned Wage Access
It's important to note that while "payroll advance" and "earned wage access" can be interchanged, they're not the same.
A payroll advance is when an employer is basically borrowing money from an upcoming paycheck, and that can be considered a form of short-term credit.
With earned wage access, a company gives its employees access to their earned wages. Real-time calculations of hours worked are done using attendance and scheduling software. Much of the time, the employees have already earned the wages, so it is not legal to classify this system as a loan.
Why Payroll Advances Have Become Popular
There are many reasons why millions of workers have started to access this system:
1. Increased Financial Stress
People across all levels of income are experiencing a greater degree of financial insecurity. A recent Bankrate survey found that around 57 percent of Americans do not have enough savings to pay for a $1,000 emergency. This financial state pushes workers toward predatory payday loans, overdraft fees, or high-interest credit.
2. Longer Pay Cycles
Employers often pay employees on a bi-weekly or semi-monthly cycle. While it is standard practice, these long pay cycles do not align with the cadence of most people's expenses. Payments for Rent, groceries, utilities, as well as gas, are due on a schedule, and it can be a large burden each month.
3. Less reliance on expensive loans
The ability to access earned wages should reduce the need for payday loans, which a lot of people have to depend on. It should be noted that payday loans have exorbitantly high interest rates, often greater than 300 percent.
4. The competition for workers
When the job market is tight and employers are having trouble finding and keeping workers, they look for additional benefits that can increase employee retention. Access to earned wages is commonly advertised as a low-cost employee benefit that increases worker satisfaction.
5. Incorporation with digital tools
Software such as OpenTimeClock makes accurate tracking of work hours possible, and therefore, automates advances that are easier to audit and more reliable.
How Payroll Advance Programs Work
Every employer has their own arrangement, but the most common programs are:
1. Employer loan programs
In some programs, the employer gives the employee an advance that the employer takes back from the next paycheck. Due to the employer taking care of the administration, these programs are often free or low-cost to the employee.
2. Outsourced earned wage access contracts.
Somewhere like Earnin, DailyPay, or Payactiv, an outside entity gives the employee their employer's money before the standard payday, and then the employee's paycheck is reduced by the outside entity to cover the money that was given in advance.
3. Paycard systems
Some companies issue cards to employees that are electronically loaded with their earnings, and then are instantly withdrawal. Fees vary depending on the card provider, but advances on the card are transferred instantly.
4. Automated pay advance systems
Some payroll providers include an automated pay advance system that helps with the admin and paperwork, and streamlines the process.
The Employee Advantages of Payroll Advances
1. Immediate help with short-term cash flow
With a payroll advance, employees can avoid unnecessary fees and charges such as overdraft fees, late fees, and utility shutoff fees. For employees with lower incomes, a payroll advance can prevent a late fee on their rent, which is often a cost of hundreds of dollars.
2. Cost is lower than payday lenders
Most advance payment programs will not be free, but their rates are often lower than the interest rate on payday loans. Some programs have a small, flat fee, while others are tip-based. When considering infrequent usage, this option may be cheaper than other credit alternatives.
3. Increased accessibility
Accessing a portion of their pay whenever they need to is something that workers value. This helps to align their income more closely with their expenditures.
4. Emotional and turnover impact
ADP Research Institute and Financial Health Network research indicate that workers using earned wage access experience improved job satisfaction and lower financial stress. This results in even better job attendance and employee retention.
5. Promotion of budgeting
Some early wage access apps come with budget tracking software, savings challenges, or earned wage tracking. Seeing their earned pay in real-time helps employees connect the dots on how their time working turns into their income.
The Downsides Employees Need to Consider
There are real benefits here, but be careful. If you are not responsible with your usage, a payroll advance could put you in a tough situation long term.
1. Establishing Reliance
This is where an employee takes an advance on their pay every week, which impacts the net pay every week. It is like living permanently "behind" on the paycheck schedule.
Example: If an employee takes an advance of $1000 every week, the employee is, in effect, working for free, because the advance is being offset by the net pay every week. In the next pay cycle, the employee, in their pay advance every week.
2. Small fees accumulate
Employees may not realize the fees they incur each week for an advance. For example, on every advance, there may be a $3 fee for every $50. That $3 fee becomes $12 every month, which is a $36 fee for the year. For advances that are taken every week, the fees accumulate quickly, and the employee should be made aware.
3. Sparse protection compared to lending
Employers may offer an advance, but it may not fall under the protection of consumer lending. There may be a lack of lending laws that govern consumer protection from predatory loans. Employers of such programs should make this clear to employees.
4. Surprise Low Net Pay
Pay employees are shocked. Their net pay for the pay period is less than they expected, because they may have taken an advance from their net pay.
5. The risk of these services
People, even employees, should not view these services as having no risk to their privacy, which the increasingly available data provides.
How Employers Use Payroll Advances Strategically
More and more employers consider early wage access to be a financial wellness benefit, such as:
Improving Attendance: Workers with financial stress may miss shifts or show up late. When employees have early access to their earned wages, it provides a financial cushion that allows employees to manage transport and childcare better.
Standing Out in Hiring: Payroll advances can be a great hiring tool for small businesses trying to recruit employees, as they allow them to compete with larger businesses and corporations.
Supporting Hourly and Shift Workers: Workers in these industries have fluctuating hours and may need their earned wages immediately.
Reducing Admin Work: Using automation reduces the manual work that previously existed with managing advances. It cuts down on errors, better compliance, and speeds up payroll reconciliation. It also saves time.
The Role of Time-Tracking Platforms: OpenTimeClock, for example, can let employers know which employee is in the workplace to avoid disputes or overpayments. When an advance system uses the same time clock for payroll, it adds a level of trust.
These integrations allow platforms to match each advance to specific hours worked. This reduces employer risk and ensures employees do not borrow more than they earn.
When Payroll Advance Makes Sense for Employees
Payroll advances can be beneficial for the following:
Emergencies
If a bill is due and it will result in a penalty or a late fee
The small amounts owed are not due until customer’s present statements- this is not constant.
No fees
Employees realize the effect on their next paycheck
The service is made available by the employer with full disclosure and policies
Financial experts advise that early access to wages is not a rewriting of a diverse budget plan, but a useful tool to complement one.
When Payroll Advances Become Risky
Used too much too often? It might be a sign that spending is outpacing income, and the pattern of advances weekly or every few days is definitely a warning sign.
Some of these signs are:
Borrowing in order to purchase things that aren't needed
Taking an advance to pay off an earlier advance
Spending more on fees than the relief on the advance is actually worth it
Finishing every pay period with less than what is required to pay the major expenses
If some of these signs were true for you, it might help to adjust your spending, or in some more serious instances might be a good time to contact a financial professional, or your job's financial wellness program if they have one.
Alternatives to Payroll Advance
Here are tips for employees who are looking for more sustainable options:
High-yield savings accounts: Creating a small emergency fund can help prevent the need for advance payments. For high-yield savings accounts with no fees.
Employer-sponsored financial education: More companies are working with financial wellness platforms that help employees develop positive budgeting and saving habits.
Credit unions: Credit unions typically offer small, low-interest loans to help their members avoid predatory payday lenders.
Overtime or shift adjustments: In some workplaces, employees can take on additional shifts to boost their earnings and help achieve their financial goals faster.
Community support and nonprofit programs: Some local nonprofits and charities can offer short-term help with food, utilities, and rent. Temporary assistance can help someone avoid financial challenges.
The Future of Payroll Advance: Flexible pay options are in high demand and will continue to grow. The following are some of the trends impacting the future of access to earned wages:
Real-time payroll: Some companies are avoiding the need for advances and adopting real-time pay systems, which pay employees immediately after a shift.
Wider employer adoption: There has been the adoption of early wage access as a fundamental benefit by companies in healthcare, hospitality, logistics, and retail.
Regulatory developments: State regulators and the CFPB continue to study models of wage access. New rules may mandate stronger disclosure requirements, limits on fees, and other regulations around wage access models.
Assisting with workforce management integrations: Platforms like OpenTimeClock continue to enable effortless tracking, reporting, and verification, making early wage access easier for employers and employees.
FAQs:
1. What is a payroll advance?
A payroll advance is an early payment of a portion of an employee’s upcoming salary. It allows workers to access their earned wages before the regular payday to cover urgent expenses.
2. Are payroll advances beneficial for employees?
Yes, they can be helpful in emergencies by providing quick financial relief. They prevent employees from relying on high-interest loans or credit cards. However, they should be used responsibly to avoid creating a cycle of dependency.
3. Do payroll advances affect future paychecks?
Yes. Since the money is taken in advance, the amount is deducted from the employee’s next paycheck. This means future pay may be lower, so employees should plan their budgets accordingly.
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