A New Boon for Financial Wellness: Early Wage Access

As published in Employee Business News, July 16, 2019

Early wage access is one way employers are helping workers better manage their expenses and avoid short- and long-term borrowing — like payday loans or dipping into retirement savings for an immediate cash need.

This tool is a logical way to give employees more control over access to their earned wages. It is also a competitive way for employers to offer flexible pay options.

The first step to implementing a successful early wage access program is to define the strategic objectives and financial wellness goals in relation to the company’s values and its employees’ needs. This will help align the program with the company’s mission, business strategy, and culture.

If employers are thinking about implementing an early wage access program, they should be asking themselves the following questions:

· Will it increase employee engagement, a foundational element of improved productivity? 
· Will it reduce employee requests for advances, which eat up HR time? 
· Will it reduce borrowing against employees’ 401(k) plans, taking payday loans, or purposely overdrafting bank accounts to meet an immediate cash need?
· Will it provide payout options to compete with other employers (e.g., Uber) that give a daily payout of wages?

Working through these cultural issues up front greatly clarifies the process of provider selection and enables employers to craft a program that rewards their investment with measurable employee engagement and productivity gains.

With strategic objectives and financial wellness goals determined, there are several due diligence considerations to help employers effectively evaluate available services and ensure a fully compliant and comprehensive early wage access solution.

Actual wage accrual versus estimations 
Using payroll, time, and labor data to calculate net wage accruals is fundamental to creating a program in which employers can be confident that employees are accessing their wages accurately and not creating a liability.

If wage access is based on an estimation of time or payroll data and funded by a third party, by definition, this is providing an advance or loan that must be collected by such third party at a later date — on or after payday. This introduces a liability to a third party at payday and can add additional costs and stress for the employee if the advance or loan cannot be repaid on time. Advance and lending providers need to be licensed in each state they operate in and need to be registered money transfer agents.

Finally, if wage advances are not deducted from payroll but rather collected by a third party, the employee pay stub may not match the employee payroll deposit, which can cause compliance issues and confusion. The third party must also act as the payor of wages on payday. Accuracy of employee pay statements, paystub reconciliation, and maintaining the direct link between the employer and employee are all important factors in early wage access program design.

Adequacy of funds for immediate cash needs
Early wage access should provide meaningful liquidity to help employees solve real emergency fund needs, like an unexpected medical bill or car repair. Programs designed for only a portion of a single day of pay, or on average $29 per transaction, are not providing amounts sufficient to address most emergency needs but rather are simply funding short-term discretionary spending.

Policies and fees
Tailoring policies for the frequency, percentage of net wage accruals, and minimum or maximum amounts ensure responsible access. Employers should avoid program design components such as short decision windows, which create impulsive action by employees and are counterproductive to financial wellness goals.

Employers need to bear in mind the inherent challenges of employee transaction fees and frequency of usage. First and foremost, fees should be transparent to the users at the time of the early wage access draw and should reflect the total and expected usage profile. Transaction fees should be capped at a reasonable monthly maximum to ensure proper value is delivered to employees without creating an additional financial burden. Confusion can arise when a provider lowers transaction fees on a promotional basis in an effort to encourage more use. Requiring employees to use a payroll card to receive their regular pay and collecting fees off the card or charging a subscription fee for the service, whether it is used or not, does not mean the service is free to employees or employers.

Pay card only payouts
Employers cannot mandate that employees deposit their entire paycheck on a pay card, so they should avoid programs utilizing a pay card-only payout approach. The card should be used for instant access to wages only. State wage laws and regulations vary on the use of pay cards, so employers should be certain their providers are compliant in all relevant states.

System security and audit verification
Validation of system security, scalability, and certifications from third-party auditors is a key step in the due diligence process. Program systems and processes should be, at a minimum, SSAE16 certified. Security processes and payment providers should have even higher levels of certification.

Regulatory review and consumer advocacy
Early wage access programs interact with and are governed by varying regulatory agencies, including the Consumer Financial Protection Bureau, the U.S. Department of the Treasury, FDIC, the Federal Reserve, and state wage and labor agencies. Program models should be compliant with regulations, and employers should not rely solely on in-house counsel legal opinions. Providers should also have high engagement with consumer advocates and policy groups.

It’s important to remember that the goal of employees achieving financial wellness is enabling them to progress beyond the paycheck-to-paycheck cycle with adequate emergency savings and a game plan for next steps.

So what comes after early wage access? The answer is progressive financial wellness support that provides employees with financial management tools, including budget-building, planning, goal-setting, education, and recommendations. Enabling early wage access is a valuable and a necessary tool in the financial wellness toolkit.