What is on-demand pay?

On-demand pay is a way for people to receive payment for their work as they earn it, rather than waiting for the end of the current payroll cycle. This can be implemented for all employee types and is done without the employer needing to change its payroll cycle. It gives staff more control over their finances and helps them avoid high-interest short-term loans.

How does on-demand pay work?

On-demand pay is usually managed through a dedicated service provider. This gives employees a platform to make requests and get instant access to some of their pay ahead of the normal schedule.

Each business can set up its own process for requesting on-demand pay and define its own limits on the amount that staff are able to withdraw.

What are the types of on-demand pay?

There are different types of on-demand pay that a business can choose to offer:

Earned wage access gives the ability to withdraw some or all of the wages earned so far before the end of the current pay cycle.

Instant pay allows staff to receive earned wages immediately after completing a shift or task.

Same-day pay allows people to receive their wages on the same day they work.

What are the benefits of on-demand pay?

There are several benefits of pay-on-demand for both employees and employers that make it worthwhile to implement.

Employee benefits

Avoidance of late fees. 42 million Americans missed a credit card payment in 2022. Late fees gradually build up over time and make it impossible to get out of the debt cycle. On-demand pay helps people avoid these fees and keep payments on track.

Covering unexpected expenses. Car breakdowns, house repairs, and medical issues need to be dealt with as soon as possible otherwise they will only become more expensive. Pay on-demand allows people to meet these surprise costs without waiting for their next paycheck.

Avoidance of bad loans. ‘Payday’ loans may seem like a good option when money is needed quickly. However, they have much higher interest rates than normal loans and are more likely to trap people in the debt cycle. On-demand pay helps staff cover all their expenses without paying high interest fees.

Employer benefits

More productive employees. Concerns over finances can raise stress levels and lead to serious health issues. By removing financial stress, staff will be happier and healthier which will lead to higher productivity. 

Better recruitment and retention. Pay-on-demand shows existing and potential employees that the company cares about them and their happiness and security. Even if they don’t intend to use the facility, including it in your compensation plan gives people peace of mind and makes them more likely to join or stay with the business.

What are the challenges with on-demand pay?

While pay-on-demand has many benefits it does come with some challenges:

Cash flow. If on-demand pay is implemented, businesses need to plan finances carefully and in advance to ensure that the more flexible payroll doesn’t impact cash flow and liquidity. Compensation management is key to maintaining control of your staffing costs. 

Transaction fees. On-demand pay platforms often charge a fee for each transaction. This will normally be much lower than overdraft, late payment, or payday loan fees, but employees still need to be aware of them. Alternatively, employers can cover the transaction fees themselves.

Legal compliance. On-demand pay can make the calculation of payroll tax and deductions more complicated. These withdrawals are not exempt from taxes so businesses need to ensure they have the appropriate processes in place to deduct the correct amount of tax and remain compliant.

On-demand pay vs. traditional payroll

There are a few questions to consider when deciding if on-demand pay is right for your business:

  • How much will an on-demand pay service cost? Does this outweigh the benefits it provides?
  • Do you have the necessary systems in place to ensure payroll compliance? If this is already an issue, adding the extra complexity of pay-on-demand will only increase the challenges of legal compliance.
  • Are you losing staff to businesses that offer on-demand pay? While traditional payroll may be simpler, offering employees more pay flexibility can be the difference between retaining them and seeing them leave.

Implementation of on-demand pay with HR tech

A modern HR system is vital to the successful implementation of on-demand pay. It should be able to integrate with any third-party system to seamlessly manage withdrawal requests and processing.

HiBob’s payroll hub is easy to use, keeps all your payroll data in one place, and connects with all leading payroll systems via Payroll Connect.