Help in Advance
Occasionally advancing workers' pay for work hours they accrued can be a valuable benefit, one some employers are now considering.
Jersey Precast, a concrete manufacturer based in Trenton, N.J., is a company that strongly cares about its workers' well-being. So when one of the almost 400 employees at the firm experiences a financial emergency -- a blown transmission, a broken water heater, an imminent cut-off of electrical service, just to name three -- and asks to be paid part of their wages early, the company has always tried to comply.
To be clear, employees in those circumstances are not asking for money they have not yet earned. Like virtually all companies, for administrative and accounting reasons, Jersey Precast holds back up to two weeks of salary. So, depending on when the financial emergency strikes, employees might have to wait up to four weeks to be paid for work hours they've accrued.
Looking back, CEO Amir Ulislam defends his thinking and his company's decision to support these workers when the policy was initially introduced. "They had a severe problem," he says. "They did their part -- they had done the work. We felt wherever possible, we should do our part by moving up their payday for part of their salary to cover an unexpected bill."
But good intentions aside, the policy had a number of problems. For one thing, workers requesting an advance had to get three to four levels of approval, starting with their direct supervisors. This created an administrative burden on the company, and often reduced workers' productivity since they usually filled out the forms on company time, and after that, may not have worked as enthusiastically while worried about the outcome. Ulislam estimates the company lost from one to two work hours to the administrative overhead related to each request. Many workers also found the process humiliating, since their financial problem was seen by so many people.
Also, for cash-flow reasons, the company, while trying to be as generous as possible, had to limit the number of advances it provided at the same time, and, to be fair to all workers, limit the number of times it provided advances to each worker. Since there were no hard and fast rules about these details, employees whose requests were denied sometimes saw fellow workers requests approved. This led some workers to believe that their supervisors were playing favorites, ironically creating discontent from the well-meaning policy.
And a final problem was that the company's payroll system is set up to pay wages once a week. So workers would have to wait until the next payday to receive their extra wages. For some, this was a serious problem.
"Many workers are reluctant to ask for an advance," says Ulislam. "So by the time they request one, they may be in real trouble. They need the money yesterday, not in four or five days."
In October 2014, Jersey Precast was able to solve all problems related to salary advances by working with San Jose, Calif.-based PayActiv, which provides emergency advances to workers through its new PayActiv App.
PayActiv charges workers a flat $5 fee to access up to $500 or 50 percent of their accrued net pay anytime they want, with no questions asked. The company installed a kiosk in Jersey Precast's lobby to allow workers to receive their money in cash immediately.
PayActiv's system interfaces with Jersey Precast's payroll and time-and-attendance systems. PayActiv receives data about how much workers have accrued, and each week Jersey Precast's payroll system deducts the loaned amount from each employee's paycheck. The company then makes one payment to PayActiv covering all its worker's loan amounts. Ulislam says the lion's share of the work on the integration of systems was handled by PayActiv over the course of a few weeks (including testing) and that the project didn't put undue strain on his company's IT department.
The biggest advantage of PayActiv to Jersey Precast and its workers is that it turned an onerous, somewhat arbitrary process into one as simple and orderly as an ATM transaction.
All evidence indicates workers love the system. Within 12 months of PayActiv's deployment of PayActiv, says Ulislam, his company's turnover rate fell from 20 percent to 6 percent. While he doesn't know how much of the reduced turnover can be directly attributed to the new solution, he believes that the benefit increased workers' engagement with the company and eliminated the uncertainties and administrative overhead of the previous, manual policy.
"Since this is a benefit that our people like, and that very few of our competitors offer, our people are less likely to look for another job," he says.
Safwan Shah, PayActiv's CEO, says at Jersey Precast, the system received a 90 on the Net Promoter Score, an index ranging from -100 to 100 designed to rate customer satisfaction by respondents' willingness to recommend the service to others.
In fact, the system is working out so well that Ulislam is considering picking up the tab for the services, eliminating the $5 fee for employees. He believes the cost to his company will be about $4,000 to $5,000 thousand a year.
Fostering Financial Wellness
PayActiv is one of a small handful of companies, including New York-based DailyPay and FlexWage Solutions, based in Mountainside, N.J., that help employers pay workers money they've accrued but have not received. Companies often find that these programs improve employee engagement and increase productivity since they may reduce stresses that keep employees from working at the top of their ability. Still relativity rare, companies that use it may be able to achieve competitive advantage in retention and recruiting at very low, or even no, cost to the company.
"This service can be an important part of a financial wellness program," says Stephanie Church, manager of business development at DailyPay. While financial-wellness programs help employees plan for future expenses, there will always be unexpected events in which an advance can help, she believes. (DailyPay is unique in that it has two separate products: an enterprise product for employers and a separate product offered to on-demand service providers, predominately ride-share and delivery drivers.)
PayActiv's Shah agrees with Church that, no matter how good a financial-wellness educational program may be, advances should be part of the overall picture for workers. "There are many people of all ages and at many levels in companies who are not in a position to meet even relatively modest financial emergencies. When they're worried about whether they will be evicted the next day or if they can afford diapers for their children, they're not paying attention to their jobs." he says.
In fact, A Report on the Economic Well-being of U.S. Households in 2015, published by the Federal Reserve in May 2016, reported that 46 percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money. And 40 percent of those who applied for credit say they faced real or perceived difficulty in getting it.
So, the only alternative for many people is a so-called "payday loan." But these loans are very expensive, often charging as much as 30-percent interest rates. In addition, where allowed by state law, some payday loan companies require people to write a post-dated check, which, if it bounces, causes the consumer to pay an overdraft fee, or in some extreme cases, even be criminally liable for passing a bad check. According to the Consumer Federation of America, an association of nonprofit consumer organizations based in Washington, 18 states and the District of Columbia virtually prohibit payday loans by disallowing excessively high interest rates.
"The problems with payday loans and of other means of getting fast cash in an emergency is a prime reason why employers should consider providing some means of advancing money," says Justine Zinkin, CEO of Neighborhood Trust, a Manhattan-based nonprofit that provides financial education and assistance to businesses and individuals throughout New York City. Neighborhood Trust uses WageBank from FlexWage internally and also offers it to employers it works with to provide financial education to workers.
WageBank takes a different tack from the other products discussed here. The company does not advance funds itself. Instead, it provides the technological backbone, the app and the integration to employers' payroll and time-and-attendance systems to allow companies to advance money to their employees directly. And in order to eliminate the need for employers to cut checks for employees who need advances, FlexWage provides employees a prepaid bank card and transfers funds from the company to the card using electronic bank transfers. Because companies' cash flows are affected by the use of WageBank, they are free to set their own policies as to how much and how often employees can use the service. But the rules are hard and fast, so no one feels unfairly treated. "Everyone knows what the system allows and does not allow. There's no paternalism or managerial discretion, which can lead to suspicion of favoritism," says Frank Dombroski, CEO of FlexWage.
Neighborhood Trust's Zinkin thinks the ability to set policies helps companies help their employees manage their finances since those policies can preclude over-dependence on emergency funding instead of careful financial planning. "Companies should be the gatekeepers. They know their employees' needs and how best to help them with emergencies," says Zinkin.
Internally, Neighborhood Trust allows its employees to withdraw up to 80 percent of their accrued net wages. But the organization is able to set such a high percentage because its employees don't need to use the service often.
FlexWage's Dombroski says most of his customers impose a limit of about 30 percent to 40 percent of accrued wages and usage limited to once a pay period or once a month.
Brian Cosgray, co-founder and CEO of DoubleNet Pay in Atlanta, fully understands why some workers may need payday advances and sees the benefits of offering them to employees, especially as an alternative to payday loans. But he also sees potential risks. "Some employees begin using pay advances as an emergency backstop. But then they get used to it, utilize it too often, end up with a smaller paycheck each week and remain behind the eight ball."
DoubleNet Pay doesn't provide payday loans -- although companies can use it in concert with services that do. Instead, it helps workers plan for bills. It can access the bill date and amount directly by connecting with the bill issuer online (the consumer, of course, has to provide the password), or the user can type in what is owed. The program then determines how much the employee will earn at the next paycheck, which is electronically deposited into a bank account to which the employees allow DoubleNet Pay access. The system then pays the bills automatically. The program also encourages users to put some money each payday into an emergency fund, with a goal of maintaining a $500 balance.
"By setting aside only a few dollars every pay period, people can move from living paycheck to paycheck to having at least some cushion," says Cosgray.
Pay-advance products and services do not yet represent anything resembling a trend. And no one knows how popular they may become with employers. But it's clear employees like the benefit. And compared to some other, much more expensive benefits, payday advance services may play a significant role in improving employee-company relations.