Why is it that those with the least wealth are often required to front the money for the essentials needed to perform their jobs?
That’s a question that struck me one night when ordering pizza. At the time, I was working as a financial engineer on Wall Street. As I folded my slice in half, I started chewing over an idea. Low-wage workers like pizza delivery drivers — who are essential to our economy and lifestyles, as evidenced by the COVID-19 pandemic — are expected to not only have enough money to sustain themselves and their families but also to front the costs of gas, car insurance, repairs and auto registration.
But it doesn’t have to be this way. Our outdated payroll system wasn’t designed to address the needs of today’s employees. An on-demand pay model, however, can give employees access to earned income, ultimately enabling them to change their socioeconomic status — while improving the bottom line for employers.
Understanding the debt cycle
Due to the nature of the biweekly pay model, workers are required to work for weeks without pay when they start a new job — and they typically must pay for certain essentials and supplies from their own pockets while they wait for their first paycheck. Because they often lack significant savings, this system negatively impacts low-wage and entry-level workers the most.
Restaurant cooks must pay for the public transport or gas required to get to their jobs, in addition to chef’s shoes and other necessities. Teachers are too often tasked with paying for their school and cleaning supplies. Even entry-level white-collar workers must purchase corporate wardrobes, and interns are often asked to use (and therefore pay for) their own laptops.
In addition to starting a new job saddled with these extra costs — all of which are necessary simply to perform their work — employees must then wait until the next pay cycle to receive their first paycheck. By this time, typical living costs like rent, groceries and utilities have already cropped up. So for many, a new opportunity translates to new debt.
While some are able to recoup these costs relatively quickly, others don’t have the same advantages. Student loan debt and high costs of living are trapping an increasing number of white-collar workers in vicious debt spirals.
As a result, many hardworking employees are forced to overdraw checking (current) accounts, skip debt payments, pay late rent fees or turn to predatory payday loans. While the fees for some of these actions can be nominal — like Chase Bank’s $34 overdraft fee — when they are compounded across accounts and over time, the financial effects can be devastating.
But if employees had access to their income as they earned it, they could pay rent, loans and other payments on time, avoiding cumulative late fees and putting that cash toward reducing debt and amassing savings.
The benefits of on-demand pay models
While employers by no means intend for their employees to become delinquent on bills or take out payday loans, the reality is that today’s antiquated pay system benefits the business while accelerating the U.S. wealth gap. It has only gotten more “expensive being poor” since James Baldwin penned those words six decades ago.
On-demand pay models, which grant employees immediate access to the money they’ve already earned for a small (typically no more than $3) fee — which is often covered by employers — give U.S. workers more control over their earnings so they can better budget, save, spend and invest.
Real-time access to earned pay empowers employees to break the debt cycle and change the economic trajectory of their lives. Unlike traditional financial products, on-demand pay is financially inclusive, offering everyone the same access, price and experience regardless of their income level or background.
And the benefits don’t stop at the employee. Seventy per cent of workers report experiencing stress over their health, jobs and finances, which translates to billions of employer dollars lost to diminished productivity. By easing employees’ financial stresses, employers see a direct, positive impact on their productivity. Additionally, workers who feel supported by their companies are happier and more engaged on the job.
On-demand pay is also linked with improved recruitment and retention efforts. Employees are increasingly seeking employers who offer these financial benefits. Attracting front-line talent is especially important in today’s environment when workers are wary of returning to work and need to know their employers have their backs. And keeping that talent is equally as important. Turnover expenses vary by industry and level, but there’s no denying how costly it is.
The benefits of on-demand pay are numerous for both employees and employers. Employees can improve their socioeconomic status and build better financial health, while employers enjoy increased productivity, engagement and retention.
But the bigger picture might be the most compelling reason to change our outdated payroll system: If you could play some small part in closing the U.S. wealth gap and improving the livelihood of your workers, why wouldn’t you?