What are earned wage access schemes?
Earned wage access (EWA) schemes allow employees to access a portion of accrued salary before their regular payday. Also referred to as flexible pay or instant or on-demand pay, the official UK government term is employer salary advance scheme.
Via these schemes, employees can choose to be paid for a portion of work that they have already done, with employers setting a threshold, usually at about 25% to 50% of earned wages, at a time that works for them, while the employer continues to run a normal payroll cycle. Providers can allow employers to limit how many times the scheme can be used per payroll cycle.
EWA schemes tend to be offered in two ways. Employers can either use a payroll system that includes an integrated on-demand pay option, such as Dayforce and Dayforce Wallet, or work with a third-party provider, like Wagestream or Hastee, to bolt on an EWA benefit. Employees will most likely access the benefit through an app, with minimal work for the employer, although some schemes require more manual work from the payroll team.
According to the Chartered Institute of Personnel and Development’s (CIPD) Reward management survey, published in April 2022, one in 10 employers provide access to an EWA scheme. The schemes are more common in lower-paid sectors where employees are typically hourly paid.
What are the cost implications?
While there are a range of models on the market, most providers offer EWA schemes free for employers, taking a transaction fee per use and generating income from other services, such as financial education. Transaction fees are usually small, around £1 to £2 per use, and it is up to the employer whether to subsidise or fully cover this or pass the cost onto the employee.
Providers have varying models in terms of whether every drawdown is funded by the provider and then recovered later, usually when running monthly payroll, or by the employer each time.
Are there any tax or legal issues?
For employees in the UK, there are no tax implications for accessing flexible pay. Meanwhile, for employers, using EWA causes no issues with reporting to HM Revenue and Customs (HMRC). HMRC has stated that employers do not need to submit real-time information (RTI) when offering EWA and can continue to submit RTI in line with their normal pay period and filings. As there is no change to when information is filed with HMRC, using EWA will not impact earnings calculations for Universal Credit or other benefits.
However, there is a potential ‘watch out’ around compliance with national minimum wage (NMW) laws. Depending on how the provider’s EWA model works, there is a chance HMRC could view transaction charges as a salary reduction. Employers need to consider whether the advance constitutes a pay deduction when pay is netted off and whether the fee charged reduces pay for NMW purposes.
Under NMW regulations, the fee would reduce pay for NMW where it is ‘for the employer’s own use and benefit’, which could be the case if the fee is deducted from payroll by the employer. To avoid this risk, employers should carefully consider different provider models, looking for those where terms and conditions make clear the fee is payable to the provider rather than the employer, with no fee deduction facilitated via payroll.
For global organisations, benefits professionals are advised to do their due diligence as regulations vary by region. Adherence to GDPR guidelines must also apply given EWA apps deal with personal data.
What are the current market trends or developments?
The EWA industry is relatively young but the use of on-demand pay is fast increasing as workers, particularly those from younger generations, look for more flexibility and face on-going cost-of-living-related challenges. According to Dayforce, its product Dayforce Wallet reached more than $1 billion in earned wage delivery in April 2023, having launched in 2020, and hitting $2 billion only five months later.
Much thinking around EWA has evolved from being seen as a benefit for people in financial distress, perhaps unable to manage their money effectively, to being part of a holistic financial planning toolkit, helping with budgeting and cash flow management. According to research by Wagestream, 76% of those using flexible pay do so when they have a bill to pay or have to make an essential purchase. Having access to an EWA scheme could reduce other forms of credit reliance: Wagestream has found 85% of users borrow less from family and friends, 73% use payday loans less and 72% use credit cards less.
As salary advances are not loans, they are not regulated and, as with any financial product, there are risks attached. In 2023, the Chartered Institute of Payroll Professionals (CIPP) published an Earned Wage Access Code of Practice to offer industry best practice guidance around responsible usage. It includes nine commitments for providers to adhere to, including communicating with customers clearly and fairly, designing products to provide fair value, and acting to deliver good outcomes and fair treatment to vulnerable consumers.
Who are the main providers and what types of schemes do they offer?
Human capital management (HCM) and payroll providers which offer the option to ‘switch on’ EWA include Access Payroll, Dayforce via Dayforce Wallet, and Cloud Pay’s Pay On-Demand service.
Third-party providers include Hastee, Level, Salary Finance and Wagestream. Such providers often have partnerships with HCM providers. For example, IRIS’ Earnings on Demand service is provided via a partnership with Hastee, while Zellis MyView PayNow is powered via Wagestream technology.