Untangling the knots of on-demand pay

On-demand pay started with Uber drivers. But Uber drivers are for the most part independent contractors who can negotiate a payment schedule with the service recipient. Employees traditionally have never had that power. That seems to be changing, as some employers are embracing on-demand pay.

Three on-demand pay leaders—(1) Jason Lee, Cofounder and CEO of Daily Pay; (2) Craig Lewis, Founder and CEO of Gig Wage; and (3) Chris Ruppel, General Manager, Wage and Corporate Disbursements at Green Dot Corp.—participated in a panel discussion concerning on-demand pay at the American Payroll Association’s Annual Congress.

What is it?

There is no one model for on-demand pay. Essentially, it’s an umbrella definition. It’s not necessarily a loan, though it might be. And it’s not a pay advance. In short, on-demand pay allows employees to access some of their accrued pay for a fee. Think of it as a micropayment.

“It’s really a spectrum,” commented Lee. “At one end, employers simply run their payrolls on demand; at the other end, employers aren’t involved at all,” he added. In the latter model, the employer contracts with a third party that handles the transactions with employees.

What drives the need for on-demand pay: All three panelists agreed the financial need is the main driver. All three also agreed that on-demand pay is better than payday loans. Finally, Lewis pointed out that on-demand pay fits in with millennials’ instant-gratification lifestyles. And millennials are the fastest-growing cohort in your company.

“From a company’s perspective, HR and the C-suite are buying into on-demand pay as a recruitment and retention tool,” said Lewis and Ruppel, who added that this is not a product that payroll would advocate for.

Issues with on-demand pay

“On-demand pay is ahead of the regulatory framework, just like paycards were,” Ruppel said. “State laws defined how employers paid wages and paycards weren’t among the choices,” he added. Now, a majority of states allow payment by paycard.

Being ahead of the regulatory framework can be a scary place. The main legal/tax concern for employers is constructive receipt. If employees can exercise control over their wages, they are taxable on them, regardless of when they’re paid. If on-demand pay is considered a pay advance, then constructive receipt comes into play. On the other hand, if a third party handles the on-demand pay, constructive receipt may not be an issue.

Reconciliations present another sticky problem. The reconciliation will differ, depending on the model. If it’s through the employer’s payroll system, the on-demand payments are fed back into it; there’s no feedback if a third party is handling the on-demand payments. The bottom line is the same—the on-demand pay must be netted out against the pay that employees receive on payday.

The next issue is more practical—what do you do if an employee has on-demanded his entire pay away for a pay period? In this situation, communication from the payroll department to the employee is key, the panelists all agreed.