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Advanced pay benefits

Employers 11.30.2020 2 MIN READ


As the COVID-19 pandemic and associated lockdowns enter their ninth month, employers are being forced to review their employee benefit offerings to ensure they meet the ever-changing needs of their workers. Many employees in the most financially affected industries—including services—have been hit especially hard by the impacts of the pandemic. In turn, employers are looking to provide their workers with greater flexibility in both benefits and pay.

Even before the COVID-19 pandemic, the popularity of advanced pay benefits was on the rise. It is projected that up to 20% of employers will offer some type of advanced pay benefit by 2023.1 Also known as “on-demand” pay benefits, these benefits allow employees to access their wages, prior to their normal payday. The allure is obvious for employees but employers need to be fully aware of the positives and negatives when considering an advanced pay benefit.

Potential advantages for employees and employers:

  • Provide employees easier—and more immediate—access to earned dollars
  • Help employees avoid:
    • Fees and high interest rates associated with payday loans
    • Bank overdraft fees
  • Assist with employers’ recruiting and retention efforts

Potential pitfalls

  • Poor budgeting habits. At a time when 4 in 10 Americans struggle to cover an unexpected expense of $400, advanced pay benefits could further exacerbate poor budgeting behavior2
  • Fees. While some providers may advertise “no fees,” employees are commonly charged a fee on each transaction and the employers themselves are charged administrative fees. Transaction fees can range from $1–$5 per transaction and they can add up quickly if an employee is using the benefit on a regular basis. For example, an employee who takes home $500/week and chooses to pay $5/day to receive their pay early could end up spending 5% of their salary on advanced pay

Alternative employer-provided solutions to advanced pay benefits

  • Financial Wellness benefit. Employees who have access to a benefit like Ayco can work with financial coaches to build a budget that addresses their short-term priorities (like cash flow, and debt reduction) while building toward long-term goals (like saving for retirement). Sound financial planning often alleviates the need for advanced pay. Financial wellness benefits can also provide a greater level of financial literacy, helping to lower employees’ daily stress and leading to a more productive workforce for employers
  • Employee Assistance Program (EAP). Many EAP providers offer tools to assist employees with budgeting and tracking expenses. Using expense-tracking tools can be eye-opening for employees, especially if they were previously unaware of how much of their income was being allocated to discretionary spending
  • Direct Deposit Savings Account. Offering a specific, liquid savings account option can provide an easy and convenient opportunity for employees to build emergency savings through regular payroll deductions—eliminating the need for advanced pay to cover an unexpected expense.