Back in 1980, author Alvin Toffler in his book, The Third Wave, divided civilization’s progress into three waves. The agricultural age was the first wave, followed by the industrial age, and the third is the information age, which is what we are moving into now as vestiges of the industrial age are gradually being replaced.
In payroll, I’ve similarly observed waves of change and transformation, and the third wave of change is happening now. Like the information age on overall society, this third wave will impact payroll much more than the other two. We need to be ready for that third wave.
Payroll’s First Wave: Automated Timekeeping
It seems like ancient history, but working as a payroll clerk in the early 1980s, while in college, I witnessed the first wave of payroll transformation: the use of electronic time clocks to record time.
The old process involved department managers, on the last day of each weekly pay cycle, adding up employee hours from time card punch-ins/punch-outs, writing each day’s total time worked and paid time off on large timesheets (that looked a lot like Excel spreadsheets, except they were paper), and totaling the amount at the end of each row.
Managers would then wrap all the time cards for their teams in their timesheet, put a rubber band around it, and drop it off at the payroll clerk’s space (I didn’t have an office, and hardly a desk).
I then had to double-check the accuracy of the time recorded on the sheet against each time card. Often there were addition and rounding issues that I had to resolve, and only then could we submit the time to a central facility that processed the payroll.
This process completely changed when the company became one of the first major clients of a new startup company that had developed automated time collection. Managers no longer calculated hours worked. The time clocks automatically calculated punches and hours worked, and stored that data as well.
There were a lot of issues with these early systems that had to be addressed — there was no employee self-service, for example — but in the end, these programs produced more accurate time submissions and produced great data for human capital management.
Fast forward to today, and according to a recent survey of payroll professionals by Bloomberg Tax & Accounting, more than 60% of respondents said they received all time submissions electronically, and more than 27% had a great majority of their time submissions received electronically.
That timekeeping company has now transformed itself into a big player in the HCM space.
Payroll’s Second Wave: Direct Deposit
The history of post-1900 wage payments starts with cash. Employers used to have payday wagons and armored cars, some with clerks bearing firearms, to distribute each employee’s wages in cash as they lined up on payday. Then, as the paper check became more accepted, employers moved away from cash envelopes to adopt this cleaner, less risky way of paying employees.
But printing all those checks on special stock was expensive, and paper checks could be faked, lost, stolen, and could otherwise burden employers in clearing accounts. As the banking system started automating payment transactions, payroll began adopting new applications to pay workers electronically directly into their bank accounts.
By the late 1980s, the process called direct deposit was proven to be faster, much cheaper, and less likely to be tampered with than any cash or paper check method of payment. Employers scrambled to adopt direct deposit and encourage all workers to use it, beginning the movement to an all-electronic payroll.
The advantages to employees were simple: no more paper check to run to the bank and deposit, and earned wages were guaranteed to be in the account on payday.
More than 99% of respondents to that recent survey of payroll professionals conducted by Bloomberg Tax & Accounting said they now offer direct deposit to their employees.
Payroll’s Third Wave: Daily Pay
If the first wave dramatically transformed time collection, and the second wave almost completely changed how people got paid, the third wave is revolutionizing when people get paid.
According to the recent survey, nearly two-thirds of respondents said they paid some workers biweekly, and more than 16% said they paid monthly. Recognizing that employers may have different pay cycles for different sets of workers, the survey data showed more than 24% have weekly pay cycles and/or semimonthly pay cycles.
Employees wait an average of four days after the pay cycle ends to be paid. That means someone paid biweekly does not have access to wages they earned for services performed at the start of the pay cycle for 17 or 18 days.
Contrast that with workers in the so-called gig industry, such as those in the ride-sharing business. These workers can get paid almost immediately after they provide their services.
While there is a debate about classification for gig workers, it is clear that those on an employer’s payroll, classified as employees, must wait until payday to cash in on their earned wages. More people are saying this is unfair, especially when solutions exist to give employees their wages on demand.
This discrepancy is being addressed, and the remedy is turning what we know as payday upside down. This is payroll’s third wave.
Employees can now get access to wages earned during the pay cycle, through a simple system when they want, and not as a loan through some web-based payday lender. Employees can benefit because they can leverage their earned income instead of putting more dollars on an interest-bearing credit card.
Earned wage access, done right, is helping employers retain workers in an economy of nearly full employment. Employers offering this benefit stand out to prospective employees as employers of choice.
But beware. Some providers claim to have a solution, but they are merely neo-payday lenders. Here are the characteristics of a legitimate daily pay benefit provider:
- Any fees associated with accessing funds are fully transparent and established, like ATM fees. Some employers cover these ATM-like charges, which stay the same for each transaction regardless of the amount accessed.
- There is no interest or debiting of end-user bank accounts.
- Access to wages is not subject to a set, specific calendar day, but can be available as long as wages have been earned.
- Employees can use this benefit to check their available balance, without making a transfer and without paying any fee.
- No changes to payroll processes are needed, including the timing of funds and withholding of taxes.
Access to earned wages, on-demand, is here, and the benefits are clear. Payroll’s third wave has arrived.