In the 2015 Employee Benefits: A Research Report from Society for Human Resource Management (SHRM), results indicated that modern workforces are gradually trying to reduce the accessibility of paycheck advances in the workplace.
Employee paycheck advances are an administrative burden. They are also high-risk for employers, constrict cash flow, and can prolong financial hardships for your employees.
But they do provide temporary relief for employees who have nowhere else to turn for a helping hand.
That’s exactly why it’s a precarious situation when you are asked for an advance. As an employer, what can you do to protect yourself but still show kindness towards your staff? Are there alternative options to paycheck advances?
Paycheck advances 101
The first step, if you haven’t already done so, is to establish a written policy about paycheck advances. You need to make it clear what an employee can expect - even before they come to you.
Answer questions like:
- Who is eligible?
- How often will you dole out paycheck advances?
- What is the maximum amount you will loan?
- How will you collect the repayment?
- What happens if an employee quits or involuntarily separates before paying the advance back?
You’ll also need to ask yourself questions about your internal capabilities to handle the requests. Do you have the resources for an additional administrative burden?
Remember, if you allow your employees to take loans, you become the collector. You may need to stay on top of your employee’s repayment schedule and ask for money if they aren’t being diligent. This can be an uncomfortable relationship between employee and employer.
Be cautious and don’t put yourself at risk
Apart from inconvenience or extended resources to help fulfill a paycheck advance request, there can also be legal recourse if you don’t administer advances correctly.
The IRS has certain expectations for companies who provide advances. For instance:
- Did you earn income from interest paid?
- Did you account for taxes?
Additionally, if you charge interest or impose fees of any type, you need to ensure the fees don’t drop your employee's pay below minimum wage, per federal law.
Any violation of these rules can result in penalties or legal issues. If you don’t feel like you’re equipped to satisfy the tax obligations, it might be best to consider alternate options.
Explore different options for paycheck advances
Luckily, there are different paths you can take if your employees ask for paycheck advances.
Can you adjust your payroll cycle?
If you’re constantly being asked for paycheck advances, perhaps you need to rethink the timing of your pay periods. Semi-monthly or monthly pay cycles can be a burden on your employees. Typically, bi-weekly is the best balance between employee happiness and employer cost.
If you are paying bi-weekly, or even weekly, and your employees are still asking for paycheck advances, consider implementing a financial wellness program.
Instilling financial education and long-term wellness
A major trend in HR in 2017 is the implementation of financial wellness programs for employees.
PricewaterhouseCooper's (PwC's) 2016 Employee Financial Wellness Survey, with responses from 1,600 full-time employees, showed that 52 percent of workers overall are stressed about their finances.
To help combat financial stress - the catalyst for employee advances - many organizations are helping teach basic financial education that their employees may not know.
SHRM found that last year:
- 24 percent of organizations offered employees online financial/investment advice.
- 27 percent offered one-on-one advice.
- 22 percent offered group or classroom financial advice.
The endless cycle of borrowing cash can’t come to an end without financial literacy and tools for financial success.
DailyPay as the solution
Employee financial wellness is important. Maintaining a positive culture is also important. But you can’t keep advancing or your bottom line will be impacted. What can you do to substitute the risk, but maintain the gesture?
DailyPay strives to give people their first steps towards financial security. DailyPay is an app that connects to any payroll system with direct deposit. Each day your employee works, their earned wages are put into a DailyPay account. DailyPay gives employees control over the timing of their earned wages. Meaning, if an emergency arises before a paycheck arrives, your employees can access their earned wages as they need.
This flexibility helps cover the gap between paychecks, and decreases the need to provide paycheck advances.
The main goal is to help employees reach their financial goals. Each DailyPay transfer comes with a financial wellness tip to build financial education and spending habit awareness.