Pros and cons of earned wage access (EWA)

As the average American worker struggles to keep up with inflation, waiting for their regularly scheduled paycheck can be challenging. One study¹ found that almost half of hourly employees had no emergency savings, and nearly 80% saved less than $500.

This is why some employers now offer earned wage access (EWA) to help their employees meet their financial needs in the middle of a pay period. EWA has grown in popularity because it gives workers a more flexible pay structure and greater financial stability.

Before setting up EWA at your organization, you must determine if it’s right for you and your employees. This blog will give you an overview of EWA, its pros and cons, and other personalized benefits you can offer to increase employee retention.

Learn what other personalized fringe benefits you can offer at your company in our guide

What is earned wage access?

Earned wage access, also known as early wage access, instant pay, earned income, or on-demand pay, is the ability for employees to access their already earned net wages before their designated payday.

EWA isn’t an advance or a payday loan. Payday loans are short-term, high-cost personal loans with steep fees and high-interest rates typically due on an employee’s next payday. EWA is a way for employees to receive income for every hour they’ve already worked. They can’t receive pay for hours they haven’t worked yet.

Giving workers instant access to their wages means an employee who finishes their eight-hour shift can immediately request their money for the eight hours they worked instead of waiting a week or two. Using EWA, an employee’s money is readily available to cover a much-needed bill or an unexpected expense.

How does earned wage access work?

Now, let’s explore how EWA works for both employers and employees.

For employers

Let’s start with how EWA works for employers. The simplest way to set up EWA at your organization is to integrate an earned wage access app with your current payroll provider. The app lets you make your necessary payroll deductions before automatically sending your employees’ available net wages to them.

Employees request their earned wages outside your regular payroll structure. Because the EWA apps integrate into your payroll system, you don’t need to make any manual changes to your standard payroll process. Some popular EWA apps are Wisely by ADP, ZayZoon, DailyPay, and PayActiv².

For employees

Employees use your chosen wage access provider’s app to request their earned wages before their regular payday. They can choose to receive all or part of the wages they have worked. However, most apps charge a withdrawal fee and a maximum withdrawal limit between $100–$500.

They then choose to have their wages transferred directly to their bank account or a pay card. They must connect their bank account to the EWA app for direct deposit. With the pay card option, employees can “bank” their money and draw from the wage balance on the card at any time, similar to a debit card.

The app deposits the employee’s remaining wages on their regular payday. For example, suppose an employee earns a $1,000 biweekly paycheck but requests and receives $200 early. The employee gets the remaining $800 at the end of the pay period.

What are the pros of earned wage access?

1. Improved employee recruitment and retention

In this tight labor market, offering EWA goes a long way toward enticing hourly workers to join your company. Especially during periods of high inflation, employers that provide their employees with benefits that help them financially tend to have an edge over their competitors.

EWA can also positively affect your retention rate. According to a Ceridian study³, 78% of Millennial and Generation X employees said having early access to wages would boost their company loyalty. Another survey⁴ found that EWA improves retention for younger employees by almost 36%.

Simply put, once your employees have on-demand access to wages, they’re less likely to leave a job for an employer that doesn’t offer it.

2. Greater employee productivity

Financial stress is a common concern nowadays, and your employees are no exception. If you have financially strapped employees, they’re more likely to fall behind on bills. This may cause them to take a second job, lowering their availability or productivity at your company.

EWA helps relieve financial stress by giving your employees visibility into their accrued daily earnings and allowing them immediate access to funds. When your employees are confident in their finances, they’ll be more engaged and productive at work and less likely to let stress or the need for a second job distract them.

3. Increased financial wellness

EWA gives employees greater control over their money to cover general bills, groceries, and other financial needs. But it can also improve their overall financial well-being.

About 150 million⁵ American workers live paycheck to paycheck. Unpaid bills and late payments can negatively impact a person’s credit score and lead to potential service shutoffs. Employees who need quick cash may turn to credit cards or payday lenders, which typically have high-interest rates and fees.

Access to on-demand pay providers can save your employees unwanted costs by avoiding late fees, bank overdraft fees, payday loans, or credit card interest. It empowers your workers to manage their budgets better and helps them make smarter financial decisions.

4. More money for unexpected emergencies

Having EWA can also help your employees if they have an unexpected personal emergency, like a medical crisis or costly car repair. Employees who experience an emergency usually need more money than expected. However, a Bankrate survey⁶ found that 25% of Americans would have to put a $1,000 emergency expense on a credit card due to insufficient savings.

With an earned wage access benefit, employees can close the gap between paychecks and quickly get the money they need to navigate their emergency. The option provides a monetary cushion if the unexpected happens, giving employees peace of mind and lessening stress during a crisis.

What are the cons of earned wage access?

1. Potential fees for employees

There are several EWA providers in the U.S., and they all charge their members in different ways. While membership and transfer fees may be easy to understand, calculating additional costs and interest rates can be challenging for some customers.

For example, an app provider may charge a transaction fee if an employee requests a same-day transfer to their bank account. These fees can add up if employees access portions of their pay regularly.

Not understanding all the potential fees that come with earned wage access can cause employees to pay unexpected costs and make the benefit not seem worth the added expense.

2. Maximum request limits

Most EWA apps have maximum request limits, which can be frustrating for employees who need to cover a larger bill, like rent or a car payment.

For instance, some apps set their limit at $500 and limit new users to $100 until they’ve used it for a certain amount of time. Other apps may restrict how often employees can request wages in a single pay period.

While app developers may see these limits as promoting the benefit for emergency use only, an ADP survey⁷ found that 62% of employees request early pay at least every other pay period. For frequent users, request limits may be a drawback.

3. Limited on-demand availability

EWA apps often promote immediate payments, but instant timely access may not be available for your employees, depending on what app you use at your company.

After an employee submits a request they could be stuck with a long wait before receiving their money. Some apps may have a mandatory one- or two-day waiting period between when employees submit wage requests and when funds are ready to access.

Even if your app offers instant access for employees for a one-time cost or allows instant pay capabilities with a premium membership, the extra fees and inflexibility for fast payouts may discourage your workers from using the benefit.

4. Privacy concerns

After your employees sign up for an earned wage app, they must provide sensitive personal and financial information to get paid. Therefore, they may not know they’re releasing confidential information to third parties in exchange for using the app.

These apps generally have robust security measures, but sharing personal information online has risks. Your employees’ sensitive data about their pay, hours, and overall financial health could be susceptible to hacking or mishandling, putting them in danger of financial harm.

Before choosing an on-demand wage system, ensure you know what data the vendor collects and how they protect it before introducing it to your employees.

What other personalized benefits can I offer my employees?

EWA is one way to support your employees financially. But having a variety of personalized employee benefits as part of your compensation package plays a crucial role in recruiting and retaining top talent.

In the sections below, we’ll highlight a few personalized benefits you can offer at your company that your employees will surely value.

Health reimbursement arrangements (HRAs)

If your employees are struggling with health costs, you can offer a health reimbursement arrangement (HRA) to cover those expenses. With an HRA, employers give their employees a monthly allowance that they can use to pay for qualified medical expenses.

You can customize your HRA by setting a budget-friendly allowance and deciding what medical expenses to allow for reimbursement. From there, your employees can choose the healthcare services and items they need. This flexibility gives your employees more power over their and their family’s medical decisions.

PeopleKeep can help you administer three popular types of HRAs: the qualified small employer HRA (QSEHRA), the individual coverage HRA (ICHRA), and the integrated HRA. While they have their differences, like company size eligibility and contribution limits, they’re all payroll tax-free for you. They are also income tax-free for your employees as long as they have minimum essential coverage (MEC).

Stipends

Another option you can leverage to boost your staff’s financial security is a stipend. Stipends allow you to reimburse workers for various expenses, such as health, wellness, transportation, and remote work costs and even employee financial literacy courses.

For example, employees who pay for internet access to work from home can take advantage of a remote work stipend and use a wellness stipend to cover the costs of wellness activities, such as gym memberships and mental health counseling.

Stipends are an excellent way to give your employees the flexibility to choose how to spend their benefit dollars. However, it’s important to note that in most cases, they’re considered taxable income for your employees.

Other personalized benefits

Outside of personalized health benefits, several other employee benefits can help employers better care for their employees and improve turnover rates.

Other personalized employee benefits to consider adding to your compensation package include:

Retirement benefits, like an IRS, 401(k), or pension
Flexible work schedules, such as remote work capabilities or a hybrid model
Paid time off (PTO), like sick time, paid holidays, and bereavement leave
Commuter benefits
Education benefits
Student loan repayment programs
Professional development opportunities

Conclusion

Providing earned wage access services is a simple way to help your employees have more control and flexibility over their earnings. They can help your employees maintain greater financial stability, making them happier, more productive, and less likely to leave your company.

If you’re looking for more ways to support your employees, an HRA or stipend may be just what you need. Contact our personalized benefits advisors, and we’ll set you up with customized employee benefits to help you have a more motivated and financially successful workforce.

This article was originally published on November 9, 2022. It was last updated on July 17, 2023.

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Elizabeth Walker

Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.