Is On-Demand Payment the New Payroll?

What is on-demand pay?

On-demand pay is an employee payment method in which employees can receive their wages as they earn them. Often, employees can only access a certain portion or have a maximum limit on their wages per pay period — the rest is paid as usual on the employee’s next standard payday. This service is offered by both payroll processors and companies focused only on providing on-demand pay service to employees.

While the fee to use on-demand pay options is typically included in the costs a payroll provider charges, companies offering this service usually charge a fee. However, unlike payroll processing, where the employer pays the fee, these companies charge the employees for the service.

With on-demand pay services, employees can decide after each shift whether they want to get paid for that day or the days since they were last paid. On-demand pay services give employees the freedom to decide how they want to get paid. This provides them some reassurance should an unexpected expense occur.

What are some examples of on-demand pay services?

Among the services placing more pay control in the hands of workers are Instant Financial, used by chains like McDonald’s, Taco Bell, KFC, and even Walmart. Through this service, employees receive a smartphone notification when they’re done working for the day and can then decide if they want to collect immediate payment for their labor. If they do, the money is either transferred to a prepaid debit card or deposited directly into their bank accounts. [Read related article: What is a Pay Card?]

While services such as Even and Instant Financial are add-ons employers can use in addition to their traditional payroll service, many payroll providers are offering this feature themselves. Gusto, Paychex and Paylocity are just some of the payroll service providers offering on-demand payment services to employers. [Need help? We researched the best payroll service companies so you don’t have to.]

The two-week pay schedule, which the Bureau of Labor Statistics reports is used by nearly 43 percent of employers, is a relic of calculating payroll taxes manually and was instituted in the U.S. almost 90 years ago.

The pros and cons of on-demand pay

On-demand pay comes with several advantages and drawbacks for both employers and employees.

For employees

The pros of on-demand pay for employees include:

• Quicker payments. With on-demand payment, employees don’t have to wait until their next payday for money. This flexibility allows employees to receive, save and spend their money on their own schedule.

• A financial safety net. If an employee is suddenly facing unexpected bills or other urgent payments, on-demand pay can help the employee quickly cover these expenses.

The downsides of on-demand pay for employees include:

• Fees. Just as some people argue that paying ATM fees to withdraw cash means paying for money, some employees may feel frustrated when they must pay fees to receive their wages on demand. In cases where on-demand pay will be used to cover unexpected bills, employees may feel these fees add insult to injury.

• Taxes. Most on-demand pay services don’t tax employee withdrawals. However, these withdrawals are not tax-exempt. Rather, employers deduct these taxes from the employee’s upcoming paycheck, which may lower the check amount more than employees anticipated.

For employers

The advantages of on-demand pay for employers include:

• Better employee retention rates. Employees whose employer has implemented on-demand pay may interpret this offering as proof the employer cares about their well-being. As such, employees may feel less compelled to leave the employer.

• More productive employees. Personal finance challenges can distract employees. Offering on-demand pay may give employees a larger financial safety net and thus limit potential distraction.

The cons of on-demand pay for employers include:

• Pay errors. Implementing on-demand pay introduces a chance, albeit a minor one, that employees will receive paychecks that include hours paid on-demand. This can lead to employers paying the same wages twice.
• Taxes. Employers must deduct taxes on on-demand wages from standard paychecks issued later. Employers who forget or fail to do so may face consequences from the IRS.

Nelson Lichtenstein is a history professor at the University of California Santa Barbara and director of the Center for the Study of Work, Labor, and Democracy. He said while the concept may sound appealing to employees, he envisions more turmoil than stability. 

“I think this creates more chaos and insecurities,” Lichtenstein said. “If you get paid every single day, you are scrambling every single day.”

Without having to wait for payday, you lose a built-in buffer that currently exists, he said.

“The two-week thing is kind of like a form of forced savings,” Lichtenstein said.

Lichtenstein believes receiving a lump sum every two weeks gives individuals more freedom to plan where that money goes. Getting paid every day, though, may place undue stress by having to prioritize where funds should be spent.

“It just strikes me as exacerbating the endemic insecurities of the bottom half of the working class,” Lichtenstein said.

One of Lichtenstein’s concerns is the cost involved in using such services. Some payroll services charge the employer, while others charge the employees a fee to withdraw their money early.

If employees are taking on the cost, Lichtenstein said it could add up quickly. Even at $3 per withdrawal, fees could cost employees a significant portion of their annual salary when brought to a total at year-end.

“It’s a nicer version of payday lending, but it is still payday lending,” Lichtenstein said.

Despite his reservations, Lichtenstein says the concept could “spread like wildfire” given the millions of Americans living paycheck to paycheck.

Best payroll services for on-demand payment

If you’re a traditional payroll provider who is interested in working with a payroll provider that extends on-demand payment services, here are a few of our top picks:

Paychex: A leading name in the payroll space, Paychex extends employers the ability to pay their employees on a daily basis. Check out our Paychex review to learn more about the payroll service provider and how on-demand payment works.

Gusto: Gusto is a popular choice among small businesses when it comes to managing payroll. The company offers on-demand payment tools as well. Read our Gusto review to learn more about this payroll provider and its on-demand payment services.

ADP: Through its DailyPay feature, ADP payroll offers on-demand payment so your employees can collect what they’re owed at the end of each workday. Read our ADP review to learn more about the service.

Is on-demand payment a fad or the future?

On-demand payment remains less common than more traditional pay schedules, such as weekly, biweekly and monthly pay periods. However, it’s an option employers can offer to their employees if they think it will boost morale, productivity and employee economic security. To offer on-demand payment, partner with a payroll service provider that offers this feature, like the ones mentioned above. They can help you set up this option for your employees to take advantage of.

Max Freedman contributed to this article.