Earned Wage Access

Demystifying earned wage access

Answers to the top questions about earned wage access, straight from an American Payroll Association webinar.
A split image showing the "American Payroll Association" and "Even" company logos

Many employers understand that providing financial wellness benefits is a key way to build productive businesses by helping employees build stronger lives. Payroll teams in particular are at the front of this movement — as the people most intimately involved with employee compensation, payroll is uniquely positioned to advocate for solutions that help employees. One of those solutions is EWA, also known as on-demand pay, which lets employees manage financial shocks without resorting to predatory alternatives, while also attracting top talent and increasing retention.

Despite the breadth of most payroll teams’ expertise, EWA can still be a difficult topic to understand. To help, the American Payroll Association recently held a private webinar titled “Everything you want to know about earned wage access, but had no one to ask.” Here are the biggest questions answered by the panel which included Even’s President and Co-founder Quinten Farmer.

When an employee accesses earned wages, is it constructive receipt of wages or treated as payment of taxable income?

An employer is required to withhold federal income tax, social security tax, and medicare tax when an employee is actually or constructively paid, which is what constitutes “constructive receipt.” The situation is different when the wages are earned, and are “payable,” but not yet paid by the employer. EWA is not constructive receipt of wages or payment of taxable income. The vendor makes an advance against those “payable” wages and the consumer agrees to repay that advance when those payable wages are paid. In Even’s case, we fund the advance directly to your employees. Payroll is never holding or providing the funds EWA is considered a loan for tax purposes, and an advance for consumer financial product purposes.

It may be different with other types of EWA providers; if the flow of funds or operating models are different from Even’s, constructive receipt might need to remain part of the conversation. This is an important thing to keep in mind for employers, because constructive receipt issues can trigger many things like employment tax liabilities, which in turn can become W-2 or 942 issues.

How have companies benefited by offering their employees access to earned wages?

When it comes to EWA and other financial wellness products, the most successful customers are ones trying to solve a concrete business problem. For example, Walmart, the nation’s largest employer, was specifically working on reducing the turnover of newly hired associates. Their data showed that associates starting their new jobs with Walmart were already financially stressed — they may have just moved, had a spouse lose a job, or be facing another challenging situation. Those associates would often work just a few days or weeks and then quit, often because they couldn’t afford the gas or childcare needed to keep their job.

Walmart wanted a financial wellness platform that did two things: Help associates get paid as soon as 24 hours after their first shift, and ensure those same associates can build a budget and savings to make progress in the long term. The benefit for Walmart has been a dramatically reduced turnover rate among new associates, specifically among associates who aren’t just using EWA but are also regularly accessing the features to track spending, build budgets, and add to their savings.

What restrictions, if any, should be placed on employee use of EWA?

A big restriction that’s meaningful for operational reasons is limiting how much of the available net pay an employee can advance, which ensures there’s a buffer for deductions and garnishments at the end of the pay period. This approach also carries significant financial health benefits for employees, because it allows them to receive a cash infusion while retaining the opportunity to save money and pay their regular bills. If employees were able to withdraw all their pay throughout the pay period, that would eliminate the lump sum “windfall” effect of a typical payday.

At Even, we enable employees to access their wages up to a percentage that’s agreed upon with the employer. This also includes a guardrail for how often an employee can request earned wages. We work with employers who have intimate knowledge of their employees’ needs, with a mutual goal of increasing short- and long-term employee financial wellness. For example, one of our partners chose to offer EWA once per week while also investing in getting employees engaged with Even’s budgeting and savings tools. This customer knows EWA is important to offer, but didn’t want to make it the star of the show.

What fees do EWA vendors charge to the employer and employees?

There are many different fee structures used by EWA providers, and these differences can have big implications for your employees. The most common models are transaction, pay card, and membership. With transaction-based models, the EWA provider makes money every time your employees access their wages early. This means the EWA provider is incentivized to keep your employees using EWA as frequently as possible, because that’s how the business will succeed. Pay card models seem free, but require employees to get their wages onto a vendor-supplied debit card, then charge fees if the employees want to use their own banking products instead.

Even operates on a membership model, which means we charge employees a flat monthly membership fee with no additional costs. It’s the only way we make money, and employees know exactly how much they’ll be paying — to access all of Even’s features, including EWA as often as needed — before they even sign up with us. Our product is designed to build financial wellness, so we’ve ensured that our business doesn’t rely on people using EWA with high rates of frequency.

As an employer, it’s important to look carefully at what types of fees EWA vendors charge employees. While there aren’t yet hard-and-fast rules or regulations around EWA, federal bodies like the Consumer Financial Protection Bureau (CFPB) have put initial guidelines in place to advise that EWA shouldn’t have payday loan-like transaction fees or be harmful to consumers in any way. Employers will want to look for a responsible on-demand pay platform so they do right by their employees and build goodwill in a way that will avoid potential future regulatory scrutiny.

Build a stronger workforce with responsible EWA

As a company focused on creating stronger workforces across the nation by offering a responsible on-demand pay solution, we’re always happy to talk to like-minded employers. To learn more about all the ways financial wellness products like those offered by Even can help your company’s and retention goals, check out our ebook: A Guide to Financial Wellness: The Employer’s Handbook for Understanding On-Demand Pay and Financial Wellness Benefits.

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