In the U.S., Walmart, an early adopter of on-demand pay, only allows employees to tap their wages once during each week of its two-week pay period.Kamil Krzaczynski/Reuters
Scrambling for ways to attract workers in Canada’s record labour shortage, some companies are turning to a perk Walmart and other large U.S. employers have been using for years stateside: giving employees the ability to cash in on their wages well before payday and sometimes as often as every working day.
Apps that allow users to tap their wages ahead of payday have surged in popularity in the United States during the early stages of the COVID-19 pandemic, when the health emergency wreaked havoc on many household budgets. In Canada, they’re catching the attention of employers eager for a competitive advantage in what has become a fight for new hires.
“For companies that are struggling to attract and retain workers and are trying to control wage costs in a high inflation environment, offering benefits like this becomes a really important tool in your toolkit,” said Seth Ross, who runs Dayforce Wallet, the advance-pay service of human-resources software company Ceridian HCM Holding Inc. Ceridian is based in Minneapolis, but led from Toronto by co-chief executives David Ossip and Leagh Turner.
On-demand pay is an easy pitch for employers: Come work for us and you won’t have to wait for payday to cash in on the wages you’ve already earned. And providers of the service argue that flexible access to income can help workers pay for financial emergencies or unexpected expenses without resorting to costly debt like credit cards and payday loans.
Alan House, chief HR officer at OTG Management, which operates restaurants and retail storefronts at airports across the U.S. and in Toronto, said his company adopted Dayforce Wallet ahead of what it expected would be a labour crunch as travel restarted.
So far, he said, the added payroll benefit has been a hit among both existing employees and new hires on both sides of the border. “It was a win both from a recruiting perspective and then, I think, overall from a retention perspective.”
Ceridian, which is leading the charge to spread early wage access in Canada, said it currently offers the service to more than 1,100 employers north and south of the border. Canadian fintech company Koho Financial Inc., which has partnered with payroll services provider ADP Canada, also offers a similar service, called Instant Pay, which allows users to access up to 50 per cent of their earned wages as often as every day of the workweek.
But early research from the U.S., where a variety of financial providers have been offering an array of advance-pay options for years, suggests being paid more often doesn’t necessarily leave workers better off.
Smaller, more frequent payments can ease our worries about whether we’ll make it to the end of the month and create an illusory sense of wealth, said Wendy De La Rosa, a professor of marketing at the Wharton School of the University of Pennsylvania.
“And as a result of that, because I feel a little bit richer, I am more likely to spend more on things that are usually discretionary expenditures like eating out,” she said.
A recent paper Ms. De La Rosa co-authored with Stephanie Tully, of the Marshall School of Business, University of Southern California, found “a naturally occurring relationship between higher payment frequencies and increased spending.” The research, based on income and expenditure data of more than 30,000 consumers from a U.S. financial services provider, showed that consumers who were paid more often consistently spent more.
Being paid monthly or every two weeks has other potential benefits as well, said Mariel Beasley, principal at Duke University’s Common Cents Lab. Having to wait until payday makes us more likely to avoid or postpone, say, that dinner out if we don’t have enough money in the bank, she said.
“Paycheques are a forced savings mechanism,” she said.
Particularly toward the end of the pay cycle, seeing a smaller balance in our chequing accounts helps us better evaluate the trade-off of spending versus holding on to what’s left, she said.
The traditional payroll cycle has another advantage, Ms. Beasley argues: A larger, more infrequent paycheque makes it easier to budget. From rent to mortgage payments and utility costs, most people’s big mandatory expenses come in monthly, she said. Having our paycheque frequency roughly match that of our bigger bills is helpful, she noted.
And that’s not to mention that the human brain typically isn’t adept at summing up smaller numbers, she added. A lot of tiny paycheques make for harder mental math.
Still, there is a case for more flexible access to earnings, consumer advocates say.
Not having enough cash on hand is a significant issue for low-income households when paycheques and bills don’t align perfectly, said Ms. De La Rosa.
And on-demand pay can be a welcome alternative to payday loans, which provide a small amount of funds at exorbitant interest rates to be repaid when the borrower receives their next paycheque, said Ms. Beasley.
While some advance-wage apps in the U.S. have come under scrutiny for charging fees and prompting users to tip for the services, others offer the service for free.
Ceridian, for example, says Dayforce Wallet comes at no cost to either employees or employers. Instead, the company makes money through interchange fees, the transaction fees that merchants pay when a customer uses a credit or debit card to make a purchase, according to Mr. Ross.
That’s because when employees request funds through the Dayforce app, the money is deposited onto a reloadable Mastercard debit card (from there, users can also withdraw it as cash from an ATM or transfer it to their bank account). When they use the card, Ceridian gets a cut of the interchange fees, Mr. Ross said. Unlike other advance-pay apps, which estimate earned wages, the company uses its payroll software to calculate net pay, including taxes and other deductions, in real time.
Koho also offers on-demand pay and a reloadable prepaid Mastercard. While depositing funds to the card is free, moving the withdrawn pay to another account costs $3.50 a transfer.
To avoid becoming a slippery slope into overspending, advance pay services need “guardrails,” Ms. Beasley said. Such safeguards could be limits on withdrawal amounts or frequency. Prompts that ask users for which kind of expenses they’re cashing in their paycheques early could also help to curb the spending instinct, she added.
In the U.S., Walmart, an early adopter of on-demand pay, only allows employees to tap their wages once during each week of its two-week pay period.
Its InstaPay feature is part of a money-management platform called Even that includes budgeting tools. For example, the app can highlight users’ upcoming bills and lets them know how much they have left to spend after mandatory expenses and savings.
“The app’s cash-flow management function is the primary component, and it is the first thing that associates see when they open the app. This design characteristic has proven successful in keeping users informed of their current cash balances and focused on budgeting for their needs,” Walmart spokesperson Josh Havens said via e-mail.
At OTG Management, around 50 per cent of U.S. employees have enrolled in Dayforce Wallet since the company rolled out the benefit in December, 2020. In Canada, where it became available in June of last year, 30 per cent have signed up so far. In both countries, workers appear to be using wage advances “on occasion,” according to Mr. House.
The company has a weekly regular pay cycle and allows employees to access their wages as often as every day, though Mr. House said that doesn’t seem to be the norm.
Mr. Ross said Ceridian lets employers set the parameters for how they want employees to be able to access advance pay.
Koho’s Instant Pay users who rely on the reloadable Mastercard also have access to the company’s suite of money-management tools, the company said.
Still, even with safeguards in place, on-demand pay is no substitute for higher wages, Ms. De La Rosa said.
In a world where wages aren’t keeping up with the cost of living, “the fundamental issue of people being underpaid is still there,” she said.
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