Recent studies show that financially stressed employees are more distracted and less effective at work. That’s why companies like Uber and Lyft are tackling the issue by providing early access to earned wages. Other industries want to follow suit, but they must do so without exposing workers to overdrafts and budget shortfalls, or they risk exposing themselves to costly liabilities. In this month’s Faster Payments Tracker, FlexWage CEO and Founder Frank Dombroski discusses how to avoid those pitfalls.
Unexpected expenses can be a major life problem for a large part of the American workforce. According to a 2018 report by the Federal Reserve, 40 percent of Americans in 2017 would have to borrow or sell something to afford a $400 emergency expense. Additionally, a PYMNTS study in 2018 found that 46 percent of Americans are living paycheck to paycheck — and, unfortunately, life doesn’t revolve around a two-week pay period.
Many workers may try to make ends meet by turning to overdraft or short-term loans, which provide needed funds at very high costs. These solutions aren’t long-term fixes, however, and can end up putting employees in precarious financial situations.
“The short-term liquidity problem [is] faced by a huge and growing base of employees,” said Frank Dombroski, founder and CEO of FlexWage, a financial wellness solutions provider focused on unbanked and underbanked individuals.
Many employers are finding that better safeguarding their employees’ financial lives boosts both morale and productivity. Financial stress affects employees’ ability to perform their jobs, and a recent study found that financially stressed workers were twice as likely to spend three or more work hours per week focused on their financial issues. These individuals were also more likely to miss work as a result of personal financial issues.
The problem extends beyond work performance, too. Other findings suggest that financially stressed employees are more than twice as likely to find new jobs, incurring expenses for employers who have to find, hire and train replacements. This is something employers cannot afford to ignore as so much of the workforce is now affected by financial stressors.
To assist employers who want to put their workers on firmer financial footing, solutions providers like FlexWage provide financial advising to help employees progress toward long-term financial security while offering early access to net earned wages, enabling them to weather financial issues before they snowball into more expensive problems.
Solutions Tailored to Full-Time Workers
Near-instant access to net earnings enables workers to deal with emergencies before the problems — and their associated costs — increase. Funds must be disbursed in ways that allow employees to access them quickly and conveniently if they’re going to help at all with financial insecurities. FlexWage achieves this by using Fiserv’s Digital Disbursements solution to disburse funds to employees’ checking accounts via payment cards.
Instant access to wages can prevent financial issues, but full-time employees in particular need to ensure they aren’t accidentally depleting their accounts by withdrawing from them when they don’t need to, Dombroski said. If they’re tempted to dip into their earnings for regular splurges, they’ll be surprised at the end of the pay period when they don’t have enough funds for monthly obligations like rent. He believes solutions providers and employers should put up guardrails for full-time workers, limiting how much money is available for early access. They can restrict how much income is accessible, or how many times per pay cycle employees are allowed to make withdrawals.
Freelance and Tipped Workers
Not all workers need the same kinds of protections, Dombroski noted, with gig work being one exception. A PYMNTS report from 2017 found 84 percent of gig workers said they would work more if they could be paid faster. There’s also less risk that gig workers will get themselves into financial straits by withdrawing too much, he added.
Ad hoc workers often take on jobs for supplemental income, and many don’t rely on gigs to support themselves, he said. As such, they do not need protective limits and, in fact, appreciate when their funds are disbursed as they are earned. Full provision of funds is also important for employers who cater to employees who have few financial burdens, but still want immediate access to their wages, such as younger workers.
“Gig workers are a little different [from full-time] — as [are] some part-time and young workers who maybe don’t have a mortgage or insurance to pay,” Dombroski said. “To attract and retain those workers — especially younger millennials [who are] used to instant gratification … like mobile [and] gamification — the model is more of a direct payment.”
Instant disbursements are also useful for restaurants. Rather than forcing managers to manually count and distribute piles of cash tips to servers at the end of each shift, an instant disbursements system can be integrated with the restaurants’ POS solutions to provide automated digital tip payouts. This digital method is often more efficient and secure.
Liability and Overdrafts
Early earnings access solutions require employers to be attuned to issues surrounding risks, liabilities and fees. If they aren’t careful, such solutions could cause a new set of financial problems. One way to remove risks for employers is to ensure that workers can access only wages they’ve already earned, with any garnishments or other deductions factored in. Workers cannot receive paycheck advances, meaning employers aren’t sending any money that hasn’t yet been earned, Dombroski said. Providing only net accrued wages also helps ensure employees don’t wind up in trouble at the end of their pay cycles.
“If somebody has a $150 garnishment, they’re not going to have a balance [for early access] until they have over $150 available net wages,” he said.
Another way employers are protected is that pay stubs are automatically updated to reflect if money has been taken in advance — a simple but important measure, as an inaccurate pay stub is a liability for a company. Most, but not all, U.S. states require employers to issue pay stubs, and federal law requires businesses to keep accurate records regarding employees’ payment details.
While concern over liabilities means that employers must be judicious when researching and implementing a solution like FlexWage, it doesn’t seem to be deterring them from taking up these offerings. There’s been growing demand for early access to net earnings across the U.S., Dombroksi said. When FlexWage first launched its solution 10 years ago, employers needed to be convinced that improving their workers’ cash flows could improve productivity and retention — an attitude that has shifted over the past two years as awareness of the need rose.
More employers now recognize that earlier wage access can have a significant impact on their employees’ lives. The right payment solutions can keep employees on firmer financial footing and, in turn, keep them loyal and attentive to work.