During the recent APA Capital Summit in Washington DC, it became clear that while the daily pay benefit is gaining momentum in the marketplace, there is also a great deal of confusion about the benefit, particularly in the areas of wages, taxes and garnishments.
I participated on a panel at the Summit, where we discussed two different models (among the many) that are used to administer on-demand pay. The program structure associated with each is significantly different, particularly in the areas of:
- Who is actually funding the payment (employer vs. vendor)?
- How is the payment reconciled on actual payday?
- What is the key difference in paystub reporting?
- How are child support and other important garnishments handled in terms of timing?
The following is a summary of that discussion.
In this model, here is the typical scenario:
- Employee requests a payment (ex. $300)
- The vendor (paycard company) transfers the money from the employer’s payroll account and remits it to the employee
- The employer runs payroll on payday
- The advance is reported as a deduction on the paystub
- The net amount is the gross amount minus all deductions, including the advance payment
Employee Paystub in Paycard Example:
In this model, DailyPay makes available a percentage of the employee's gross wages earned, using an algorithm that accounts ahead of time for all deductions, based on an employee’s previous pay data.
Here is the same scenario using DailyPay:
- Employee requests a transfer (ex. $300)
- DailyPay funds the payment with its money (not the employer’s payroll account)
- The employer runs normal payroll, taking out all applicable taxes, garnishments, etc, as it normally would.
- The employee receives the total amount (100%) of net wages owed, deposited into a unique DailyPay account
- DailyPay recoups the amount that the employee received through the early transfer
Employee Paystub in DailyPay example (no change from normal paystub):
Note that this reflects the fact that the employee has received 100% of her paycheck into her direct deposit account, i.e, her DailyPay Account.
DailyPay recoups the $300 advance from the employee’s DailyPay Account. There has been no change in the employer’s payroll process or the timing of payroll funds, including what actually appears on the employee’s paystub.
Key Distinction Between the Two Models
In the paycard model example, if that employee had a $150 child support garnishment, the employee would not have enough left over on payday to pay the garnishment. In the DailyPay example, the employee would never be in a position to transfer more than her net pay AFTER child support (and other taxes and deductions). This is because DailyPay uses an algorithm to factor in those deductions ahead of time.
DailyPay safeguards the child support payment (or any other important garnishment) to ensure that the money is available. DailyPay does not interfere with an employee’s deductions, and if there is an error in calculation, DailyPay assumes all of the risk. The employer simply runs its normal payroll process, with the employee’s standard deductions, and those deductions remain intact. The employee receives 100% of net wages and DailyPay is repaid monies advanced to the employee on the backend, through the DailyPay account that the employee has set up.
This is an extremely important distinction between the two models, and it addresses the main concern of garnishment agencies, like child support, which is, “How can we ensure that there is enough left over on payday to cover the garnishment, if an employee receives early transfer of wages?”
In the DailyPay model, DailyPay unilaterally sets the balance available for transfer, using a precise algorithm (adjusted over time through machine learning). The employee sets their DailyPay account as their payroll deposit account, and the employer simply runs payroll as usual. The employer has no involvement in the private transaction between the employee and DailyPay.
All information described here is based on publicly available information and should be assumed to be for marketing purposes only. Any reference to a paycard model is generic and not in reference to one particular vendor. Any resemblance is purely coincidence and not meant to represent one particular model