Earned Wage Access: what it is and how it works

PwC’s 2023 Employee Financial Wellness Survey has shown that financial worries are the main cause for stress for 57% of employees. Personal finance issues can be a major distraction at work, which is why it’s in every business’s interest to increase employee financial wellbeing. One of the measures companies can take to reduce finance-related stress among employees is introducing an Earned Wage Access scheme.

Earned Wage Access (EWA) is currently a hot topic in the payroll industry. As interest in faster salary payment methods continues to grow, more employers are considering introducing EWA. However, there are many questions surrounding the new payroll feature.

What is Earned Wage Access? How does Earned Wage Access work? What are the benefits for both employees and employers? And how should companies implement an EWA program?

Earned Wage Access (EWA), also known as on-demand pay, instant pay, or early pay, is a payment method that allows employees to get early access to the part of their wages that they have already earned by the time they forward their request.

EWA enables employees to receive a part of their pay before the respective pay period is over. This leads to greater financial flexibility and eliminates the need to ask for a payroll advance in cases where employees receive an unexpected bill that cannot wait until the next payroll cycle.

So, how does Earned Wage Access work? EWA schemes are usually based on a mobile app or software application through which access to earned wages is both requested and granted. Employees use the app to seek early access to their earned wages, and the software issues the payment.

Under normal circumstances, a business first needs to run payroll and calculate how much payroll tax to deduct from employee wages and salaries before an employee’s net pay can be paid out. One outcome of this element is that many employers wonder if EWA schemes have an impact on how they process their payroll.

Earned Wage Access applications most often take the form of payroll software integrations that sit on top of a company’s regular payroll system. This means that employee EWA requests are processed separately from the business’s regular payroll.

The amount of wages the employee has already earned in the current pay period is determined by the EWA provider based on regular earnings and deductions. In many cases, the amount that is made available to the employee is capped at a certain percentage of the actual net earnings to leave room for tax and other payroll deductions. The actual deductions are made in the next payroll run.

There are no off-cycle payroll payments required nor any changes regarding payroll-tax withholding and reporting. But with EWA still being a relatively new feature in the payroll landscape, Earned Wage Access regulation is still evolving.

In short, employers offering EWA run payroll as usual. The only aspect that is different is that payroll payments need to be reconciled with the part of pay that has already been claimed by the employee.

The possibility to access earned wages before the actual payday can make a huge difference on an employee’s financial situation. The benefits experienced by employees whose employers provide on-demand pay include:

• Greater financial and mental wellbeing: Financial worries can be very stressful for employees, which is why avoiding mental distress related to finances is an important step to greater employee wellbeing at and outside of work.

• Easier access to funds in case of unexpected bills or emergencies: According to CNBC, 58% of workers in the U.S. live from paycheck to paycheck. When money is tight, unexpected bills can quickly turn into severe financial worries and force employees to either pay bills late, incur overdraft fees, or get an expensive payday loan. Earned Wage Access can help reduce the stress level in such situations by making money available to employees whenever they need it without incurring additional fees that worsen their financial situation further.

• More financial flexibility: Payroll cycles and due dates for living expenses, such as rent or utilities, don’t always align. In the worst case, employees have to pay all their major living expenses before the next paycheck arrives. Earned Wage Access can solve this problem by making funds available on demand, hence increasing the financial flexibility of employees.

Many employers are hesitant to introduce Earned Wage Access because EWA programs cost money. However, given that EWA is not just beneficial to employees, but also to employers, paying the fees associated with the technology is money worth spending. EWA benefits for companies include:

• Valuable asset for talent acquisition: The benefits and compensation package offered by a company plays an important role when it comes to talent acquisition. Offering Earned Wage Access as a benefit to employees can have a positive impact on the business’s ability to attract top talent. EWA is a popular financial benefit among employees. In fact, 79% of respondents in an EWA-focused survey stated their willingness to switch to an employer who offered Earned Wage Access.

• Improved employee retention: Benefits that aim at improving employee financial wellbeing are important contributors to employee retention. A study carried out in 2019 has shown that 89% of employees questioned would stay longer with a company offering on-demand pay.

• Positive impact on employee productivity: Financial worries can weigh down heavily on an employee's productivity at work. If employees are constantly thinking about their financial troubles, it’s near impossible to focus on work. Offering on-demand pay means helping employees sort out their finances and concentrate exclusively on work during office hours.

• Less work compared to payroll advances: Without EWA, the only options for employees who are in urgent need for cash is to request a payroll advance from their employer. Payroll advances involve several formal requirements and represent additional work for the payroll team who has to check, grant, and finally track the advance payment to make sure it is deducted from the employee’s next paycheck. Earned Wage Access is a far easier option.

• Enhanced employee motivation: Being able to access their pay early is a great motivator for employees. In fact, surveys among EWA-using employees have shown that 56% of them are more motivated to work when having access to early-pay options.

Businesses that want to implement on-demand pay need to go through several steps, including:

1. Find a suitable EWA provider

The first step consists in selecting an Earned Wage Access provider—or choosing a payroll provider that offers EWA. Selection criteria to consider include security standards (since the EWA application will have access to sensitive payroll data), program cost and applicable fees, and compliance advice with regard to Earned Wage Access legislation.

2. Work out the conditions for the EWA scheme

Just as any other services offered to employees, Earned Wage Access schemes are subject to certain conditions. Employers that want to offer on-demand pay as a benefit should think about aspects such as:

• How long will it take from the moment of the request to the receipt of the payment?

• Will the program be entirely sponsored by the company or will there be a small fee for employees?

• Will there be any limitations, such as how often employees can use the on-demand pay option within one payroll cycle?

3. Deploy the EWA application

The next step is the integration of the tech application with the main payroll system. This includes enabling data transfers between the two systems so that the EWA application can estimate employee net pay that has already been earned in the pay period in question.

4. Enroll employees in the EWA program

This step involves informing employees about the terms that apply to the Earned Wage Access program and getting their consent. Last but not least, employees need to be given access to the app or online platform through which on-demand pay requests are processed.