Interest continues to grow in programs that allow workers to access at least part of their pay ahead of their regular payday. Surveys consistently show that on-demand pay—often called earned wage access (EWA)—is a popular perk for many employees and employers alike. Employers see it as a way to attract and retain workers, and employees like knowing they have quick access to their money before payday. But with the regulatory picture still blurry and other complexities unsettled, both employers and employees have much to consider.

Varying models

Although EWA has gotten more common in recent years, questions persist about how it should work. The basics are simple: On-demand pay programs allow employees to access wages that have been earned but are not yet due. Then on payday, the worker’s pay is reduced by the amount taken early.

Typically, employers contract with a third-party vendor—often their payroll company—to make the early payments and adjust the payday amounts. Some vendors charge a fee the employee must pay. Other arrangements call for the employer to cover the fee.

Some programs put a cap on the number of times a worker can collect pay early, some limit the amount that can be accessed, and some limit both. Often, programs provide instant access to the funds, but others require a day or two before the money becomes available.

The fact that fees often are involved complicates the issue. If an employee must pay even a small fee to collect earned wages, is it just an advance on pay or is it instead more like a loan, since loans require payment of fees?

The federal Consumer Financial Protection Bureau (CFPB) has weighed in on the issue over the last few years indicating that a “covered EWA program” doesn’t constitute an extension of credit and as a result isn’t subject to regulations applying to extensions of credit.

But the law isn’t entirely settled, and some programs may cross the line into extending credit instead of just advancing wages earned but not yet due.

Perception versus reality

ADP, a payroll services provider that also offers EWA programs, surveyed 600 employers and 1,000 employees during the first quarter of 2022 about their thoughts on earned wage access. They found both employers and employees had positive attitudes about the perk.

Another finding from the ADP survey shows that workers often underestimate how often they would take advantage of on-demand pay. The ADP report says 37% of employees without access to EWA estimated that if they had it, they would use it only when a specific need occurred. Another quarter thought they would use EWA one to six times a year, and 20% thought they might use it every or every other pay period.

But the ADP research found that 62% of employees who actually have access to EWA said they requested early access every or every other pay period. Another third said they used it one to six times per year, and just 7% said they used EWA only when a specific need occurred.

The research also looked at generational differences in how workers use EWA. The most common reasons cited by workers aged 18 to 24 were buying groceries, reducing stress related to having enough cash until payday, paying a loan, and paying rent or a mortgage.

The most common reasons cited by workers aged 25 to 44 were expenses related to family, paying a bill, buying groceries, and emergency expenses related to a car.

Workers aged 45 to 64 most often cited expenses related to family, paying a bill, buying groceries, and emergency medical expenses.

Pros, cons for employers

Although having the opportunity to access wages before payday is becoming more common—and many employees and jobseekers now expect it—employers offering EWA must weigh the pros against the cons.

Employers like to offer on-demand pay because it can help with recruitment and retention. Other reasons often cited include greater productivity related to employees feeling like they have more financial flexibility and security.

But downsides exist. The regulatory climate is unsettled, and states as well as the federal government may take regulatory action as the practice continues to get more common.

Also, how to get the tax withholding correct has been an issue. The federal tax code requires tax withholding when employees are in “constructive receipt” of their wages. That gets complicated when wages are accessed outside of the regular payday schedule.

But in May 2022, the U.S. Treasury Department issued a proposal to provide that the payroll period for on-demand pay arrangements be treated as a weekly payroll period even if employees have access to their wages during the week. Also, the proposal would amend the tax code to clarify that on-demand pay arrangements are not loans.