Thursday, August 11 2022

In the US, Walmart, an early adopter of on-demand pay, only allows its employees to collect their wages once per week of their two-week pay period.Kamil Krzaczynski/Reuters

Seeking ways to attract workers amid Canada’s record-breaking labor shortage, some companies are turning to a perk Walmart and other big US employers have used in the US for years: giving employees the ability to claim their wages well before payday and sometimes redeem as many times as possible each working day.

Apps that allow users to check their pay before payday gained popularity in the United States during the early stages of the COVID-19 pandemic, when the public health emergency devastated many household budgets. In Canada, they are attracting the attention of employers looking for a competitive advantage in a hiring battle.

“For companies that are struggling to attract and retain workers and are trying to control labor costs in a high-inflation environment, offering benefits like this becomes a really important tool in your toolkit,” said Seth Ross, who Dayforce operates Wallet, the advanced paid service from human resources software company Ceridian HCM Holding Inc. Ceridian is based in Minneapolis but is managed from Toronto by co-CEOs David Ossip and Leagh Turner.

Pay on Demand is a simple argument for employers: work for us and you don’t have to wait until payday to redeem your already earned wages. And providers of the service argue that flexible access to income can help workers meet financial emergencies or unexpected expenses without resorting to costly debt like credit cards and payday loans.

Alan House, chief HR officer at OTG Management, which operates restaurants and retail outlets at airports in the US and Toronto, said his company launched Dayforce Wallet before it anticipated there would be a labor crisis when travel resumed .

So far, the additional salary benefit has been a hit with both existing employees and new hires on both sides of the border. “It was a win, both from a recruitment perspective and, I think, overall retention perspective.”

Ceridian, which is leading the charge of spreading early wage access in Canada, said it currently offers the service to more than 1,100 employers north and south of the border. Canadian fintech Koho Financial Inc., which has partnered with payroll service provider ADP Canada, also offers a similar service called Instant Pay, which allows users to pay up to 50 percent of their earned wages any day of the workweek access .

But early research from the US, where a variety of financial services firms have offered a range of upfront payment options for years, suggests that workers aren’t necessarily better off when they’re paid more often.

Smaller, more frequent payments can ease our worries about making it to the end of the month and create an illusionary sense of wealth, said Wendy De La Rosa, professor of marketing at the University of Pennsylvania’s Wharton School.

“And as a result, because I’m feeling a little bit richer, I’m more likely to spend more on things that are usually voluntary, like going out to eat,” she said.

A recent study, co-authored by Ms. De La Rosa with Stephanie Tully of the University of Southern California’s Marshall School of Business, found “a natural relationship between higher frequency of payments and higher spending.” The research, based on income and spending data from more than 30,000 consumers from a US financial services firm, showed that consumers who got paid more consistently spent more.

Being paid monthly or biweekly has other potential benefits, too, said Mariel Beasley, director of Duke University’s Common Cents Lab. Having to wait until payday makes it more likely that we’ll avoid or postpone dinner if we don’t have enough money in the bank, she said.

“Paychecks are a forced savings mechanism,” she said.

Especially toward the end of the pay cycle, having a smaller balance on our checking accounts helps us better assess the trade-off between spending and holding on to what’s left, she said.

The traditional payroll cycle has another benefit, Ms. Beasley argues: A larger, less frequent paycheck makes budgeting easier. From rent to mortgage payments to utilities, most people’s big mandatory expenses come monthly, she said. It helps that our payroll frequency is roughly the same as our larger bills, she noted.

And not to mention that the human brain isn’t normally capable of summarizing smaller numbers, she added. Lots of tiny paychecks make for harder mental arithmetic.

Still, there are arguments for more flexible access to revenue, say consumer advocates.

Not having enough cash on hand is a significant problem for low-income households when paychecks and bills aren’t perfectly aligned, Ms De La Rosa said.

And on-demand payments can be a welcome alternative to payday loans, where a small amount is repaid at exorbitant interest rates when the borrower gets their next paycheck, Ms Beasley said.

While some advance apps have come under scrutiny in the US for charging and requiring users to tip for the services, others offer the service for free.

Ceridian, for example, says Dayforce Wallet has no cost to employees or employers. Instead, the company makes money from interbank fees, the transaction fees merchants pay when a customer uses a credit or debit card to make a purchase, according to Mr. Ross.

Because when employees request money through the Dayforce app, the money is deposited into a rechargeable Mastercard debit card (from where users can also withdraw it as cash from an ATM or transfer it to their bank account). If they use the card, Ceridian gets a cut in interchange fees, Mr. Ross said. Unlike other prepayment apps that estimate earned wages, the company uses its payroll software to calculate net wages, including taxes and other deductions, in real time.

Koho also offers pay-on-demand and a rechargeable prepaid Mastercard. While depositing funds onto the card is free, transferring the withdrawn amount to another account costs $3.50 per transfer.

To avoid becoming a slippery slope to overspending, prepayment services need “guard rails,” Ms. Beasley said. Such safeguards could include limitations on payout amounts or frequency. Prompts asking users what kind of expenses they’re cashing their paychecks for early could also help curb the urge to buy, she added.

In the US, Walmart, an early adopter of on-demand pay, only allows its employees to collect their wages once per week of their two-week pay period.

The InstaPay feature is part of a money management platform called Even that includes budgeting tools. For example, the app can highlight users’ upcoming bills and tell them how much they have left to spend after mandatory spending and savings.

“The app’s cash flow management feature is the core component and the first thing employees see when they open the app. This design feature has proven successful in keeping users informed of their current cash holdings and focused on budgeting for their needs,” Walmart spokesman Josh Havens said via email.

At OTG Management, approximately 50 percent of US employees have signed up for Dayforce Wallet since the company launched the benefit in December 2020. In Canada, where it became available last June, 30 percent have signed up so far. According to Mr House, workers in both countries appear to be taking wage advances “on occasion”.

The company has a regular weekly pay cycle and allows employees to access their pay as often as each day, although Mr House said that doesn’t appear to be the norm.

Mr Ross said Ceridian leaves it up to employers to set the parameters of how they want employees to have access to upfront pay.

Kohos Instant Pay users who rely on the reloadable Mastercard also have access to the company’s money management tools, the company said.

Even where safeguards are in place, on-demand pay is not a substitute for higher wages, Ms De La Rosa said.

In a world where wages are not keeping pace with the cost of living, “the fundamental problem of people being underpaid is still there,” she said.

Are you a young Canadian with money on your mind? To set yourself up for success and avoid costly mistakes, Listen to our award-winning Stress Test Podcast.

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