There is a new normal in the workforce: a younger generation of professionals that prioritize flexibility and technology. Giving rise to the gig economy and a new face of freelancing, these professionals are changing the way employers work, too, including how they pay these workers.
In PYMNTS’ latest analysis, Pay Advances: The Gig Economy’s New Normal, a collaboration with Mastercard, research reveals some of the more dramatic impacts the gig economy has had on payroll.
The option to access pay advances can be essential to gig workers that often live paycheck-to-paycheck. According to PYMNTS research, nearly 44 percent of gig workers in the U.S. have received either full or partial advance payment for their services — and are willing to pay fees for that advance payment, too.
Last year, employers paid out $236 billion worth of advance payments to their gig workers, the report revealed, with the market expecting that figure to continue climbing.
It’s possible that this trend could spill out into the traditional workforce, too, as more FinTechs introduce ways for full- and part-time employees to receive a portion of their paychecks before payday. According to PYMNTS analysis, $245.1 billion in wages could be issued in advance to unskilled workers — if that option were more readily available.
Driving the possible end of the two-week pay cycle, these solutions are supporting financial wellness and cash flow strength for employees, while promoting talent retention for employers.
Employers Jump In
FinTech solutions are popping up to promote this trend.
Walmart inked a deal with Even in 2017 to provide real-time access to wages for the retailer’s employees, while last year, payroll firm ADP announced DailyPay, a new solution allowing its merchant customers to provide access to daily earned wages via the ADP Marketplace — both of which are initiatives signaling corporates’ interest in offering such an incentive to their staff.
And earlier this year, Visa and PayActiv teamed up on a solution that allows employers to access earned wages in real-time, noting in their announcement of the collaboration that “the demand for instant access to earned wages has now extended to batch payroll.”
“This is not a loan,” clarified Visa Direct SVP and head of North America push payments Cecilia Frew in a subsequent interview with Karen Webster. “It is money owed to the worker that they are choosing whether they want to access it early or not.”
That’s a critical distinction considering the rising controversy over predatory payday loans.
While FinTechs and payment technology firms are exploring ways to wield technology to connect employees with their wages on-demand — often with a focus of helping workers avoid the sometimes detrimental trap of payday lending — these solutions can also help employers avoid similarly dangerous risks.
A recent report in the Associated Press warned of the dangers of employees providing loans to their employees in an effort to promote cash flow strength and loyalty among their staff.
“Many small business owners lend money to staffers who are short of cash before payday or who have unexpected expenses or crises,” the publication wrote. “The risk bosses face is not getting paid back.”
According to reports, current labor laws makes the ability for employers to recover funds they lent to employees very difficult.
The AP pointed to one business owner, Matthew Ross, co-owner of mattress review site Slumber Yard, who agreed to provide a $15,000 loan to one employee to purchase a new car, and another $10,000 loan for a down payment on a condo. Both agreements were interest-free with the borrowing employees making their payments out of their future paychecks.
“It’s a big financial risk for my business partner and me but we feel like keeping our employees is one of the best things we can do for the overall health of the business,” Ross told the publication.
Yet reports emphasized the importance of developing written agreements with employees to ensure everyone understands what scenarios can make them eligible for such a loan, as well as repayment plans.
Insperity consultant Rick Gibbs told the AP that turning to other financial resources can help employers promote the financial well-being and satisfaction of their staff without taking on the risks themselves.
As FinTech solutions explore how to connect gig workers and other professionals to portions of their paychecks ahead of payday, the industry is also certainly going to continue exploring new methods of offering employees affordable and fair financing that use future paychecks in their repayment plans — both to help employees avoid the threat of predatory payday loans, and to help employers avoid the risk of nonpayment.