Many of us have probably found ourselves in a situation where we need money urgently, but the next paycheck is still days or weeks away. In fact, according to PYMNTS’ research, 61% of U.S. consumers are living paycheck to paycheck in April 2022.
There are many reasons why people might need their wages before payday. Perhaps because of an unexpected bill or the need to cover a short-term shortfall. And without enough savings, people rely on high-cost credit products, such as payday loans, just to make ends meet.
Fortunately, there’s a solution to help workers access their earned wages on demand without waiting for their next payday. This article will explain everything you need to know about Earned Wage Access (EWA) and how it works. We’ll also cover the benefits, challenges, and tips for using EWA effectively. So, read on to learn more.
What is Earned Wage Access (EWA)?
Earned wage access (EWA) is a payroll solution that allows employees to access their earnings before their scheduled payday. Through EWA, employees can receive a portion of their paycheck on demand, while the rest of their salaries will be deposited into their account on the usual payday.
For example, an employee who receives $1200 on the 15th day of every month can claim $600 on the 8th. Then, accept the remaining $600 on the 15th. It’s like getting an advance on their paycheck.
How Earned Wage Access works?
Employers will typically set up an EWA system through a third-party provider. It uses special software integrated with the payroll system that tracks employees’ work hours. When an employee requests a withdrawal, the software calculates how much they have earned since their last payday and transfers the funds to them on demand.
However, the amount of money an employee can access will vary based on the company policy, but it’s typically a percentage of the employee’s total earnings. For instance, if the company’s program only offers EWA at a rate of 50%, then an employee earning $800 can only access $400. The other $400 would be deposited into the employee’s account on payday, as usual.
Additionally, there are various methods that employees get paid early, depending on the company’s preference. Such are mobile apps, online portals, or physical cards the employer provides. Usually, requested funds are credited between one to two business days. And, some providers may charge a minimal percentage of the amount withdrawn (e.g., 1%).
Benefits of EWA to Employees and Employers
There are several benefits of Earned Wage Access for both employees and employers. These benefits include the following.
1. Access to earned wages.
The most significant benefit of EWA is that it allows employees to access their earned wages before payday, which can be helpful in various situations, such as covering an unexpected expense or making ends meet until the next paycheck arrives.
2. Avoid high-cost credit products.
Because EWA provides employees with access to cash when needed, it can help them avoid high-cost credit products, such as payday loans. This can save employees a lot of money in interest and fees.
3. Improved financial stability.
Earned wage access lets consumers be in control of their finances. With this, employees will be better prepared for some emergencies that can lead to improved financial stability and peace of mind.
1. Improved employee retention.
Employers can improve employee retention and reduce turnover by offering EWA as it can help employees in financial distress and make the workplace more attractive to job seekers.
2. Increased productivity.
When employees are worried about their finances, it can lead to decreased productivity at work. But with EWA, employees can have peace of mind knowing they can claim their earnings when they need them the most, resulting in increased productivity and engagement.
3. Reduced absences.
Financial stress can also lead to increased absences from work. But with EWA, employees will have one less thing to worry about, and they can be more likely to show up for work.
Overall, earned wage access can be a win-win for employees and employers. It can help employees in financial distress while also benefiting employers in terms of productivity, engagement, and retention.
Challenges Associated with Earned Wage Access
Earned wage access can be a helpful tool. However, a few challenges must be considered before using this system.
Fees: As mentioned above, there are typically fees associated with EWA. These fees can vary depending on the provider but can add up over time.
Access to debt: While EWA can help employees avoid high-cost credit products, it can also lead to increased borrowing if not used responsibly, creating a debt cycle that can be difficult to break.
Financial literacy: For EWA to be genuinely beneficial, employees must understand personal finance and budgeting well. Otherwise, they may have financial difficulty despite having access to their earnings.
Data security: Because EWA relies on data, there is a risk that sensitive information could be compromised. Thus, employees and employers should be aware of data breaches and identity theft.
Repayment: In some cases, employers may require employees to repay their EWA advances before they leave the company. But, it can be a challenge for employees already in financial distress.
Tips on Using Earned Wage Access Effectively
If you’re interested in using earned wage access, you can do a few things to get started.
1. Research providers
There are a variety of EWA providers out there. It’s essential to do your research to find one that best meets your needs. Consider factors such as fees, repayment terms, and data security.
2. Educate yourself and your employees
As mentioned above, financial literacy is key to making the most of EWA. Ensure you understand the system’s workings and educate your employees on budgeting and financial responsibility.
3. Be prepared for challenges
You should be aware of a few challenges that can come up with EWA. Prepare a contingency plan so you can address these challenges as soon as they arise.
4. Implement a trial period
Before rolling out EWA to all of your employees, you may want to consider a trial period to give you a chance to see how it works and make any necessary adjustments.
5. Evaluate the results
After using EWA for a while, take some time to evaluate the results. Are your employees using it responsibly? Is it having the desired effect on productivity and engagement? Make sure to assess the system regularly to ensure it’s working well.
Earned wage access is definitely a probable solution to the financial woes of many American workers. It’s still a new concept, so more research must be done to solidify its potential. Nevertheless, earned wage access has shown a lot of promise in terms of its ability to help workers gain greater financial stability. So, if you want your employees to have access to their earnings at the most crucial time, earned wage access could be an excellent option for you.
Tell us how we can improve?