What is on-demand pay

On-demand pay is a flexible payment arrangement that allows employees to access a portion of their earned wages before the scheduled payday.

Also known as earned wage access (EWA) or instant pay, on-demand pay enables employees to receive their earnings within a few hours (or days) of completing their work rather than waiting until the end of their scheduled pay cycle. This may mean taking home a single day’s wages or receiving a portion of their salary two weeks into the work month and before the traditional pay date.

In most instances, there is a maximum limit on the amount that workers can access before their pay date.

The remaining wages are usually paid on the standard payday.

How does on-demand pay work?

On-demand pay is a flexible payment structure that can be adapted to each employer and employee’s preferences. Regardless of the specifics, the process demands the same general considerations.

Integration with payroll system

Integrating with the payroll system is a crucial first step in implementing a successful on-demand pay program that benefits employees and employers.

Streamlined integration allows employees to access a portion of their wages before the scheduled payday without disrupting the normal payroll processes.

On-demand payroll systems configure data on employee hours worked, wages earned, and other payroll information and automate the pay request process.

See: How to implement payroll systems for small businesses

Employee eligibility

Before implementing an on-demand pay system, you must determine which employees can use the service. Establishing employee eligibility ensures the process is fair and minimizes the risk of managers and workers abusing or misusing the service.

Eligibility criteria may include factors such as:

• the length of time an employee has worked for the company,
• their job position and
• their employment status (such as full-time or part-time)

Also, consider state and local laws, as well as industry-specific regulations that may apply to ensure compliance.

Payment processing and timing

When an eligible employee requests early pay, the on-demand pay software processes the payment and transfers the funds to the employee’s bank account or prepaid pay card.

The timing of these payments varies depending on your policies and the payment method used.

For example, some on-demand pay services offer instant pay, while others take several hours or days to process and execute the payment request.

For the smoothest on-demand pay experience, share your company's policies on on-demand pay processes and timelines with your workers and any fees you may charge.

What are some examples of on-demand pay?

Many service industry companies use on-demand pay frameworks. Companies like McDonald's and KFC, for instance, notify workers about available shifts and the opportunity for instant pay. The workers then specify if they would like to collect a paycheck at the end of their shift.

This is just one example in one industry.

According to the Bureau of Labor Statistics (BLS), about 37% of private employers allow workers to receive two weeks' pay before the traditional end-month pay date.

How does on-demand pay work for global and remote teams?

For global teams, on-demand pay takes on several more layers of complexity due to the different labor laws and financial systems at play. To set up on-demand pay for your remote workers or international assignees, consider the following factors:

• The labor, payroll, and tax laws in each country
• The financial institutions available in each country and the payment methods they support
• The local culture in each country regarding pay and wages

With our expansive team of in-house payroll experts, Deel can help you navigate the intricacies of global payroll. We take over or automate your payroll tasks, saving you precious HR hours and the headache of tracking payroll compliance across different jurisdictions.

What are the benefits of on-demand pay?

On-demand pay offers a range of benefits for both employees and employers, including the following.

For employers

Increased employee retention

On-demand pay is a powerful tool for decreasing employee turnover.

You create a positive and supportive work environment by giving employees more control over their earnings and greater financial stability.

Employees who feel valued and supported are more likely to stay with you long-term. According to a 2022 PwC report, financially stressed workers are twice as likely as financially secure employees to search for a new employer.

Positive company culture

Offering on-demand pay establishes a culture of trust and respect with your employees. Supporting your workers’ financial needs demonstrates your commitment to their overall wellbeing.

It encourages them to be transparent and open with you, which creates a positive and supportive work environment that boosts productivity and job satisfaction.

Increased productivity

Employees who feel financially supported at work are better positioned to perform at their best. This is because they don't have financial worries weighing on their minds and know you will help them deal with any unexpected expenses should they come up.

Competitive edge in recruiting

On-demand pay sets you apart as a desirable employer, helping you attract and retain top talent. According to a Gallup poll, 64% of workers consider benefits and pay when picking a new employer. Offering on-demand wages gives you a competitive edge in the job market by demonstrating your flexibility with pay and concern for your workers’ financial wellbeing.

For employees

Financial wellness

As an employee, on-demand pay gives you greater control over your cash flow. Early access to a portion of your salary comes in handy during financial emergencies because you don’t have to rely on expensive payday loans and credit cards for survival. This reduces your employee financial stress and can improve job satisfaction and productivity at work.

Employer support

Many employers provide on-demand pay alongside other financial support programs designed to make your personal life as easy as possible. You may also have access to financial literacy training, financial wellness programs, employer-backed loans, and more.

Access to emergency funds

When unexpected things happen, such as your home needing repairs or your car breaking down, on-demand pay is the fastest way to access emergency funds. Because this money is earned, it's not a loan, so you don't have to worry about high interest rates or long applications.

What are the possible downsides of on-demand pay?

Some errors may occur with on-demand pay if you fail to administer and integrate it well with the rest of your payroll. These include:

High transaction fees

You get charged a transaction fee every time you process an on-demand pay request. Administering on-demand pay also requires extra administrative and HR hours, depending on the level of support your payroll provider offers.

If you do not regulate how often employees can request early wages, these costs could quickly run up your overhead costs and disrupt your budget.

See: How to reduce payroll costs in Germany

Potential for misuse

On-demand pay also carries the risk of employee misuse. Some employees may request funds often simply because they can and not for any legitimate use or emergency. The best way to minimize the risk of misuse is to:

• Establishing clear on-demand pay policies and procedures
• Set amount limits for early payouts
• Perform regular reviews to monitor how often each employee accesses the service

Cash flow problems

Paying employees outside the traditional pay dates can disrupt your cash flow and liquidity, mainly because you rarely have time to budget or prepare for on-demand pay requests.

If your cash flow dries out during the moment, you may have trouble fulfilling client orders, paying vendors, updating licenses, and more.

To address this risk:

• Include on-demand pay requests in your budget
• Balance your need to support employees with the need to maintain liquidity; this means limiting the number of requests per period an employee can make

Free resource:The complete guide to HR budget planning for global teams

Payroll disruption

Implementing on-demand pay requires changes to your existing payroll system and processes, which can be time-consuming when done manually. It can make end-month payments more difficult to trace because some employees are due for full pay while others only portions.

The additional administrative tasks of managing early payouts and resolving technical issues may also impact your HR’s compensation packages.

Streamlining the on-demand pay request process is the best way to protect your primary payroll system.

Pay errors

If there is an error in your on-demand pay system, you may miscalculate an employee's wages and make a pay error. Pay errors are difficult to fix on time because most workers use their salaries immediately after receiving them, giving you a tiny window to catch and correct your error.

Availing portions of an employee's salary before their pay date also makes it more challenging to track variable forms of compensation, such as:

• Overtime
• Deductions
• Bonuses
• Commissions

To avoid pay errors, use a streamlined, 360-degree payroll system like Deel Payroll that calculates, logs, and monitors employee wages in real time.

How does on-demand pay impact tax and payroll compliance?

When an employee receives an early payout, the payment is considered taxable income and must be reported on their annual tax return. This means you must withhold the appropriate amount of taxes from the employee’s regular paycheck and any on-demand pay payments.

You must also consider the impact of early pay on employee benefits packages like healthcare and retirement plans. Deel's Payroll platform features an integrated compliance hub to help you adjust employee payments in line with local and regional law and your company's pay policy.

How can I implement an on-demand pay policy?

Implementing an on-demand pay policy requires careful planning and consideration of the potential pros and cons. Consider the following helpful tips for implementation:

• Establish your employees’ need for early pay. Conduct reviews and surveys to understand if and how much your workers need in early wages
• Pick a reputable provider like Deel Payroll to integrate the on-demand pay feature into your payroll without disrupting your traditional pay policies
• Integrate on-demand pay into your payroll system compliantly, taking into account local and regional labor laws regarding pay, taxes, and employee benefits
• Create and educate your team on your on-demand pay policy so they know when and how to use it. This should prevent misuse
• Evaluate the policy’s impact on your budget and cash flow a few months into the integration and adjust your on-demand pay policy accordingly.

Is on-demand pay a compliance issue?

Yes. Like other forms of payroll, on-demand pay is subject to local and federal payroll and tax regulations, with laws changing every day.

There is currently no federal law specifically targeting on-demand pay in the US. However, in 2024, congress introduced the Earned Wage Access Consumer Protection Act to the House, which is a first step toward regulating earned wage access programs in the country.

State-wise, Missouri, Nevada, and Wisconsin have legal frameworks dictating the administration of on-demand pay, with four other states in the process of formulating their own. The policies protect workers from credit inquiries and hidden fees related to on-demand pay.

As an employer, you must provide on-demand pay to employees in line with the local, regional, or federal policies that apply to payroll in your area.

Streamline your on-demand pay policies with Deel Payroll

Work closely with the world's best payroll provider to streamline your on-demand pay processes and integrate compliantly with your payroll.

Deel’s Payroll solution lets you:

• Track employee hours and overtime
• Manage benefits and tax obligations
• Adjust pay rates in line with labor laws
• Automate salary payments
• Generate compliant receipts and more

Reach out to a member of the team or book a demo today to test out your on-demand pay policies before roll out.