Most businesses pay employees bimonthly or monthly. However, payroll advances give employees more control over when they can use the money they earn.
This is an unsecured loan that employees repay in ensuing paychecks. Advances do not typically have interest; in fact, laws prevent employers from profiting from them. This financial tool is designed to help employees through difficult periods, and an increasing number of employers are offering them in response to employees’ — and especially hourly workers’ — financial stress.
For the right business, a payroll advance benefit can remove some of the stress potentially keeping employees from working to the best of their ability. Here’s a framework to help you decide if an advance will benefit your workforce.
Common Features of a Payroll Advance
Payroll advances are:
Typically granted only for work already done
Often applied for using a simple online interface or form
Usually for amounts smaller than the next scheduled paycheck
Assessed a minimal administrative fee or very low interest rate
Commonly repaid via payroll deduction over relatively short terms, weeks or months
Also be sure to account for taxes, insurance premiums and any deductions, such as for a 401(k), when issuing advances.
Plenty of organizations have added advances to their list of employee services, from Walmart to Lee’s Famous Recipe Chicken, Gideon USA and Emco Industries. ADP also announced that it was adding functionality for payroll advances to its ADP Marketplace. However, this benefit is viable for more than just large businesses.
The Pros and Cons of Payroll Advances
Payroll loans are a highly practical offering for organizations with hourly workers. Payday loans can charge up to $30 for every $100 borrowed, and bank overdraft fees are about $35. Employer-based advances charge as little as $5 per pay period. For companies whose employees are losing money on external payday loans, overdrafts or late fees, low-cost employer advances can offer significant financial relief. This has retention benefits as well: Money concerns are a major factor in employee stress, and removing the distraction of this constant worry can result in better engagement at work, fewer sick days and higher productivity.
That said, some experts are wary of how these advances work because of the risk that the benefit may create an employee dependency on future pay. One way to mitigate this risk is to limit the number of advances an employee can take in the course of a calendar year. The administrative work can also be significant. Introducing this benefit means having to account for hourly rates, overtime, maintaining minimum wage levels, the federal Truth in Lending Act and other factors. Make sure you have the capability to deliver on your advances before offering the benefit to employees. Third-party vendors are also available to reduce the administrative burden on your in-house staff. If the policies are unclear, payroll advances can also create confusion for your employees — not to mention you — if a payroll advance is involved when already stressful situations like layoffs, time off, leave or workers compensation issues arise.
Any company considering this benefit should draft a clear, easily understood written policy that spells out how payroll advances work, including eligibility, loan amounts, any fees or interest, terms and other considerations. In some organizations, requesting an advance automatically triggers an offer for optional financial counseling. And keep in mind that, although it may be tempting to ask for details about why your employee needs the money, be wary of asking for information that could be viewed as potentially discriminatory.
Payroll loans are a practical and powerful way to assist employees during times of financial duress. When coupled with strong financial education, they can be a valuable benefit that encourages loyalty and boosts retention.
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