Earned wage access

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Earned wage access (EWA), can be referred to as instant pay, earned income, early wage access, accrued wage access or on-demand pay.[ citation needed ] The official UK government term is Employer Salary Advance Scheme. [1]

Contents

Earned wage access is a financial service offered to employees, mostly low-wage and hourly workers, being given access to some of their accrued wages before the end of their payroll cycle.

Earned wage access technology can be implemented in various ways: automatically loaded onto a prepaid card, deposited via ACH onto a user's existing direct deposit, or, in a bifocal approach, accrued earnings are transferred into a bank account facilitated by the EWA provider.[ citation needed ]

Earned wage access providers have been positioned as an ethical solution to payday lenders as they typically charge a small flat fee rather than interest, and there is no recourse, credit impacts, or underwriting in earned wage access transactions. [2]

In the United States, 20% of all hourly staff are expected to be paid this way by 2023, [3] with many large employers like Walmart and McDonald's already offering it. [4]

History

Earned wage access programs began to reach the market in the 2010s, due to the receding number of Americans who had access to credit and traditional banking. By integrating with payroll, these promised to usher in a fairer and more inclusive era of personal finance.

In August 2016, Uber pioneered EWA in a partnership with Green Dot by allowing drivers to request their earnings after each drive in exchange for a small payment. [5]

In July 2018, ADP, the largest payroll provider in America, began offering an EWA solution in their marketplace. [6]

In May 2019, Lyft introduced a similar feature to its drivers in a partnership with Mastercard. [7]

UK Market

Theoretically, 'EWA' has even more potential in the UK where the typical pay cycle is monthly, [8] rather than bi-weekly as is the case in the US.

As recommended by the Financial Conduct Authority, the UK’s leading providers of Earned Wage Access/On-Demand Pay have come together and created the world's first 'EWA' Code of Practice. [9]

Models

As earned wage access exists today, there are two distinct models. In the employer-integrated earned wage access model, if an employee accesses their earned wages ahead of payday, EWA transaction is adjusted from an employee's paycheck on payday.[ citation needed ]

In the direct-to-consumer model, users will still receive the entirety of their paycheck at the end of each payroll cycle. At the end of each payroll cycle, however, the advancements made to the user are subtracted from the direct deposit account noted on the user's payday. [10] New laws in Nevada and Missouri protect users from potential overdraft risks in this model. [11]

Benefits

Earned wage access is promoted as bringing income more inline with expenses, helping workers to avoid cashflow issues that could result in them taking out high-interest debt. [12] The academic consensus supports this claim, with research finding better financial outcomes for users vs. non-users. [13]

There is also a moral argument made by some[ who? ] that, instead of employers benefiting from the cash flow advantages of paying in arrears, staff are entitled to the pay they've already earned.

Many earned wage access providers also highlight the benefits to the employer, including quicker recruitment, better staff retention, a more motivated workforce and a greater staff appetite for overtime and extra shifts. [14] Marketing claims vary across the industry, from reducing staff turnover by 50% [15] to increasing shift uptake by 26%.

Criticism

States like Nevada and Missouri have regulated earned wage access providers by creating a new earned wage access license and required them to be licensed. [16]

Monica Burks, of the Center for Responsible Lending, warns that, "[t]he industry is trying to create a new definition for what a loan is in order to exempt themselves from existing consumer protection laws." [17]

In the UK, the government is broadly optimistic about the sector and appears to be encouraging take-up. [18] This is possibly in response to several think tanks and charities throwing their reputation behind the concept. [19]

Risks

For consumers

Consumer risk is highly dependent on the specific strategy the EWA provider chooses to take when offering the advances. Some users have been forced into overdraft as they were allowed to advance more than they received in their paycheck. [20] Most reputable providers cap advances well below total income and charge no interest at all.

For EWA providers

EWA providers are held responsible for recollecting the advances they make the consumers. As such, they face risk if they advance too much to the user and risk the user defaulting. All in all, however, EWA providers face dramatically lower risk than other credit providers as the advances they make are backed by hours the loan recipient has already worked towards. [21]

Related Research Articles

A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.

<span class="mw-page-title-main">Payroll tax</span> Tax imposed on employers or employees

Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the employer, but almost all economists agree that the true economic incidence of a payroll tax is unaffected by this distinction, and falls largely or entirely on workers in the form of lower wages. Because payroll taxes fall exclusively on wages and not on returns to financial or physical investments, payroll taxes may contribute to underinvestment in human capital, such as higher education.

<span class="mw-page-title-main">Payroll</span> Record of money paid or due to employees

A payroll is a list of employees of a company who are entitled to receive compensation as well as other work benefits, as well as the amounts that each should obtain. Along with the amounts that each employee should receive for time worked or tasks performed, payroll can also refer to a company's records of payments that were previously made to employees, including salaries and wages, bonuses, and withheld taxes, or the company's department that deals with compensation. A company may handle all aspects of the payroll process in-house or can outsource aspects to a payroll processing company.

<span class="mw-page-title-main">Salary</span> Form of periodic payment from an employer to an employee

A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. Salary can also be considered as the cost of hiring and keeping human resources for corporate operations, and is hence referred to as personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.

<span class="mw-page-title-main">Payday loan</span> Short-term unsecured loan

A payday loan is a short-term unsecured loan, often characterized by high interest rates. These loans are typically designed to cover immediate financial needs and are intended to be repaid on the borrower's next payday.

A loan shark is a person who offers loans at extremely high or illegal interest rates, has strict terms of collection, and generally operates outside the law, often using the threat of violence or other illegal, aggressive, and extortionate actions when seeking to enforce the satisfaction of the debt. As a consistent or repeated illegal business operation or "racket", loansharking is generally associated with organized crime and certain criminal organizations.

<span class="mw-page-title-main">Accrual</span> In finance, adding together of interest or different investments over a period of time

In finance, an accrual (accumulation) of something is the adding together of interest or different investments over a period of time. The term may also refer to forward provision made at the end of a financial period for work which has been done but not yet invoiced for.

<span class="mw-page-title-main">Paycheck</span> Document issued by an employer to pay an employee for services rendered

A paycheck, also spelled paycheque, pay check or pay cheque, is traditionally a paper document issued by an employer to pay an employee for services rendered. In recent times, the physical paycheck has been increasingly replaced by electronic direct deposits to the employee's designated bank account or loaded onto a payroll card. Employees may still receive a pay slip to detail the calculations of the final payment amount.

Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

<span class="mw-page-title-main">Piece work</span> Payment of wages per unit of output

Piece work or piecework is any type of employment in which a worker is paid a fixed piece rate for each unit produced or action performed, regardless of time.

Paid time off, planned time off, or personal time off (PTO), is a policy in some employee handbooks that provides a bank of hours in which the employer pools sick days, vacation days, and personal days that allows employees to use as the need or desire arises. This policy pertains mainly to the United States, where there are no federal legal requirements for a minimum number of paid vacation days. Instead, U.S. companies determine the amount of paid time off that will be allotted to employees, while keeping in mind the payoff in recruiting and retaining employees.

<span class="mw-page-title-main">Defined benefit pension plan</span> Type of pension plan

Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provide defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

Cycle to Work scheme is a UK Government tax exemption initiative introduced in the Finance Act 1999 to promote healthier journeys to work and to reduce environmental pollution. It allows employers to loan cycles and cyclists' safety equipment to employees as a tax-free benefit. The exemption was one of a series of measures introduced under the Government's Green Transport Plan. A Cycle to Work scheme does not require the prior approval of HMRC.

<span class="mw-page-title-main">Payday loans in the United States</span> Overview of payday loans

A payday loan is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday." The loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the United States, between different states.

<span class="mw-page-title-main">Payday loans in the United Kingdom</span>

Payday loans in the United Kingdom are typically small value and for short periods. Payday loans are often used as a term by members of the public generically to refer to all forms of High-cost Short-term credit (HCSTC) including instalment loans, e.g. 3-9 month products, rather than just loans provided until the next pay day.

<span class="mw-page-title-main">Paycheck Protection Program</span> U.S. federal government business loan program

The Paycheck Protection Program (PPP) is a $953-billion business loan program established by the United States federal government during the Trump administration in 2020 through the Coronavirus Aid, Relief, and Economic Security Act to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers.

EarnIn is a financial services company that provides earned wage access services. Founded as Activehours in 2013, the app launched in May 2014. The company's business model, which is based on users paying voluntary "tips" to withdraw earned wages ahead of time, has been compared to payday lending services. It expanded its services in 2019 to include negotiating with doctors and hospitals to lower its users' medical bills. In 2020, EarnIn acquired and implemented a new savings feature, Tip Yourself.

PayActiv is a financial services company headquartered in Milpitas, California. PayActiv partners with companies to provide employees with financial services such as earned wage access.

DailyPay is an American financial services company founded in 2015, which provides payroll services such as earned wage access. DailyPay charges up to $3.49 for users to receive 100% of their earned but unpaid income.

Even is an American financial services company founded in 2015. The company is headquartered in Oakland, California and is known for providing payroll and accounting services including earned wage access.

References

  1. ↑ "FCA sets out views on Employer Salary Advance Schemes". FCA. 2020-07-29. Retrieved 2021-06-10.
  2. ↑ "Home". Earned Wage Access. Retrieved 2023-09-01.
  3. ↑ Ron, Hanscome. "Empower Workers and Energize Your Employment Value Proposition With Flexible Earned Wage Access". Gartner.
  4. ↑ Jessica, Stillman. "McDonald's Has Started Offering an Innovative New Employee Perk. It's Either Genius or a Total Disaster". Inc.
  5. ↑ "Uber Taps Green Dot For Instant Pay Service". PYMNTS.com. 2016-08-17. Retrieved 2020-10-27.
  6. ↑ "ADP Adds DailyPay To Marketplace". 2018-07-26.
  7. ↑ "Mastercard, Lyft launch co-branded banking, debit card with immediate driver pay". www.mobilepaymentstoday.com. 2019-05-15. Retrieved 2020-10-27.
  8. ↑ Bell; Cominetti; Slaughter, Torsten; Nye; Hannah. "A new settlement for the low paid: Beyond the minimum wage to dignity and respect" (PDF). Resolution Foundation.{{cite web}}: CS1 maint: multiple names: authors list (link)
  9. ↑ "Earned Wage Access (EWA) Code of Practice". www.cipp.org.uk. CIPP. Retrieved September 18, 2023.
  10. ↑ "Earned wage access: the most important benefit in a post-COVID-19 world". Employee Benefit News. 2020-05-05. Retrieved 2020-10-27.
  11. ↑ "Nevada Enacts Nation's First State Licensing Regime for Earned Wage Access Services | Insights | Greenberg Traurig LLP". www.gtlaw.com. Retrieved 2023-09-01.
  12. ↑ "Give your people the flexibility to choose how and when they get paid". Wagestream.
  13. ↑ Hawkins, J (2021). "Earned wage access and the end of payday lending" (PDF). Boston University Law Review. 101: 705.
  14. ↑ Level. "Make Pay Go Further". Level Financial Technology. Level.
  15. ↑ REBA. "Capita experiences 50% reduction in contact centre agent attrition after deploying Level". REBA.
  16. ↑ "Nevada Enacts Nation's First State Licensing Regime for Earned Wage Access Services | Insights | Greenberg Traurig LLP".
  17. ↑ "Fintech's Latest Scheme". The Prospect.
  18. ↑ FCA (29 July 2020). "FCA sets out views on Employer Salary Advance Schemes". Financial Conduct Authority.
  19. ↑ Bell; Cominetti; Slaughter, Torsten; Cominetti; Slaughter. "A new settlement for the low paid" (PDF). Resolution Foundation.{{cite web}}: CS1 maint: multiple names: authors list (link)
  20. ↑ Siegel Bernard, Tara (2020-10-02). "Apps Will Get You Paid Early, for a Price". The New York Times. ISSN   0362-4331 . Retrieved 2020-10-27.
  21. ↑ "The Power of the Salary Link". www.hks.harvard.edu. Retrieved 2020-10-27.
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