When someone first hears about earned wage access (EWA), the concept may seem counterintuitive. The idea of allowing employees to spend money before it’s technically paid out sounds risky, but in reality, it can actually be a very smart business decision.
As the name implies, EWA concerns employee wages that have already been earned. It is not a form of advance payment for future work, and it is not a way to get around paying payroll taxes. EWA is simply a way to pay employees before their wages are due — and there’s no reason for employers to shy away from it under certain circumstances.
Read on to find out more about those circumstances.
An Overview of Earned Wage Access
EWA is the process by which employers can allow their employees to use their salary or wage before being paid. It can be used in a variety of situations, such as when an employee needs to pay for a service that cannot be postponed until the next paycheck. For instance, if an employee has a car repair bill due at the end of the month and cannot afford it, they may request EWA from their employer so that they can pay for it immediately instead of waiting several weeks.
In brief, EWA lets employees:
- Use their earnings before cash flow issues arise
- Get out of debt quicker
- Pay bills on time and avoid late fees and penalties
An EWA is also known as deferred compensation (or, salary advance). It’s different from payday loans because it’s not considered a loan — it’s more like a form of advance paycheck that is repaid once the employee’s next paycheck comes in.
Employees Really Like EWA
EWA offers employees the flexibility of receiving their pay ahead of time for whatever reason they choose. That way, employees can better plan their finances, save money, pay off debt, and manage expenses, all without having to worry about the hassle of getting a loan. It’s also a great way for employers to help their employees out if they are struggling with financial hardship.
For instance, employees can use EWA to:
- Achieve Greater Financial Security: With the ability to receive their earned wages early, employees can better manage their finances and avoid missing payments or being late on bills.
- Better Financial Planning: With the ability to receive their pay in advance, employees can plan ahead and avoid financial struggles that come with unexpected expenses or emergencies. They can also potentially use EWA to save for vacations and other big events.
- Improved Credit: By using EWA responsibly, employees can improve their credit scores over time by showing a history of responsible use of credit cards and other types of accounts. This may help them qualify for loans and make it easier for them to apply for housing down the road.
EWA can also have many benefits for employers themselves. Allowing earned wage access can build goodwill between employers and employees, making them more likely to stay on with the company and remain productive. This can save employers money in the long run, as they won’t have to constantly hire and train new employees. EWA can also help them attract more qualified applicants in the future.
Employers who offer EWA tend to have an easier time finding qualified applicants because EWA is popular among workers in all age groups. In fact, 91% of millennials say they would prefer working at a company that offers EWA, showing that this benefit is a strong selling point for employers.
In an era where good help has become so hard to find, providing EWA can be a great way to attract the best and brightest employees. This can help employers build a strong workforce that can meet today’s challenges and lay the groundwork for future success.
Incorporating EWA Into Existing Payrolls
Many companies find it challenging to implement EWA into their existing payment structures. These difficulties arise from conflicting laws and regulations, as well as a lack of clarity about what exactly constitutes EWA. As such, it’s important for employers to understand the ins and outs of EWA before they start offering this benefit.
One challenge employers face when implementing an EWA program is that they must comply with all applicable federal and state laws on the matter. These should be consulted before you decide to offer EWA benefits. Some states may not allow EWA benefits at all, while others may allow them but with certain restrictions.
The cost of implementing existing payroll structures is also a concern for many employers. This is because they need to consider how much money it would take to set up new systems and processes in order to pay workers who receive EWA. Additionally, there can be ongoing costs associated with running these programs if they are not properly managed or monitored by employers.
Before advertising EWA benefits to new applicants, employers should ask themselves:
- Will this benefit actually assist employees?
- How will the benefit affect company culture?
- Is this something new employees should think about when deciding where to work?
Finally, employers should consider their own financial situation before making EWA benefits available. If the business is not in a position to offer these kinds of benefits, it may be more beneficial for both parties if this fact is made clear from the beginning rather than after an employee has already accepted an offer of employment.
Updating Payroll Systems to Support EWA
Before incorporating EWA into existing payment systems, employees must be willing to agree to the EWA’s terms and conditions. These could include things like fee structure, length of time for the EWA to be used, repayment terms, and other conditions that could impact the employer’s ability to receive reimbursement.
Employers often work with a third-party EWA service provider to handle the distribution of early wages. These providers are responsible for assessing how much of their wages an employee is actually eligible to receive early, as well as providing employers with the necessary tax information and forms.
Employers should ensure that they have access to whichever payroll system they use when employees begin receiving their EWA payments. This can be done through some of the same methods used by third-party providers, who typically have an API available to integrate with existing systems.
Distributing EWA Payments
The actual distribution of earned wage access begins with an employee request indicating how they want to receive their funds (according to the terms prearranged). Upon receiving this request, the company will then pay the employee in accordance with their chosen method.
The employer may require that the employee provide proof that they have met certain criteria before they can receive their payment, though. This might include providing a government-issued photo ID or Social Security card. The employer may also require that the employee provide documentation showing that they have received the payment, such as a bank statement or pay stub.
Settling the EWA will typically involve:
- Deducting the Payment From the Payroll: The employer will deduct the earmarked amount from their payroll, either in one lump sum or in installments. It is important that they notify their employees about these deductions, though, so that an unexpected drop in their paycheck does not surprise them.
- Settling the Payment With the Employer: Employees need to have an account established with their employer so they can withdraw their funds. The EWA provider will monitor associated transactions, ensure that each EWA payment was made correctly, and reimburse the employer’s account to cover the cost of the EWA.
In this way, the employee and employer are protected against any problem with the EWA payment. The employee is protected because their funds are drawn directly from an account that they control, and the employer is protected because their money is returned to them if there is a problem. The EWA provider acts as an intermediary to ensure that the payment goes through correctly and efficiently.
However, employees should also understand the fee structure built into earned wage access. Those fees will vary by provider, but generally, the employer will pay a fee that is a percentage of the total wages that are earned. This fee covers the cost of providing EWA services and can be used to cover any necessary expenses such as processing payments or covering overdrafts.
Offering EWA Has Clear Benefits
Earned wage access can be a beneficial arrangement for employers and employees alike. It keeps employees happy, and happy employees make for a productive workforce. EWA also helps employees ensure that they are paid on time and in full, so they can avoid missing payroll or having to pay late fees. Employers can even use EWA as an incentive to work harder and earn more money.
Of course, working with an experienced EWA provider can make the process more efficient for both parties. An EWA provider can help employers:
- Manage their payroll
- Handle tax reporting and compliance issues
- Provide additional tools to make the job of running a business easier
Resourcing Edge has a team of experts who can help employers navigate the entire EWA process. Contact us to learn more about what we can do to help.