What Is On-Demand Pay & Why Should Employers Care?
On-Demand Pay (ODP) is fast becoming the norm for many workers. The NHS, Tesco, Capita and McDonald’s already offer on-demand pay, and one in five Americans are paid this way.
This is the ultimate ‘cheat sheet’ and contains everything employers need to know about ODP. Written in plain English.
Contents
What is On-Demand Pay?
Explanation
Alternative Names
Worked Example
The Financial Health of UK Workers
On-Demand Pay Pros & Cons
On-Demand Pay Pros
On-Demand Pay Cons (& How to Avoid Them)
Adoption of On-Demand Pay in the UK
Why Has On-Demand Pay Become More Popular Recently?
What Do Workers Really Think Of It?
What Organisations Already Offer It?
The Details
How Does On-Demand Pay Work?
On-Demand Pay App
On-Demand Pay Fees
On-Demand Pay Regulations
A (Very) Brief History of On-Demand Pay
Buyers Guide
List of UK Providers
Key Considerations
About Level
Conclusion
What is On-Demand Pay?
ODP Meaning
ODP is a tool that gives staff the flexibility to access their earned income anyday they need, rather than having to wait for payday.
New technology enables this relatively simply, without impacting the employer’s payroll process or cashflow.
Is this the same as a wage advance or loan?
No. It’s important to note that this is not a loan and, accordingly, there is no interest to be paid by the employee. It is also not an advance, as only money earned – rather than future earnings – can be accessed.
Alternative Names for On-Demand Pay
Confusingly, ODP is often referred to by other names, including:
Earned Wage Access
Wage Advance
Flexible Pay
Employer Salary Advance Scheme
Instant Pay
Early Wage Access
All of the above refer to exactly the same technology, simply by different labels.
Worked Example
If Steve gets paid £100 a shift and has worked 5 shifts since his last payday, he has earned £500 in gross earnings. Usually, he wouldn’t be able to access this until payday, which could still be many weeks away.
ODP would allow him to withdraw a portion of this immediately. If, for example, his employer had set the cap to 50% of gross earnings, Steve could access up to £250 on this day of the month.
The Financial Health of UK Workers
A large percentage of the UK’s workforce struggles with poor financial health, and the situation has worsened over the last year due to the cost-of-living crisis.
The result is that two out of three UK adults would struggle to pay an unexpected bill of just £250, due to a lack of savings. In fact, one in six have no savings at all, and a quarter of the UK population has less than £100 saved. This drives short-term debt use, with UK workers spending £2 billion annually on payday loans and £2.4 billion on unarranged overdraft fees.
Paradoxically, the worse someone’s financial health is, the more they are typically charged for using financial products; if they are granted access to them at all. This ‘poverty premium’ and financial exclusion creates a vicious cycle of low savings and high debt use that is hard to break away from.
In the context of the workplace, this results in an increasingly stressed and unhappy workers, reduced productivity and increased absenteeism. It’s estimated that, on average, UK workers spend 13 hours a month worrying about their personal finances while at work; and poor financial wellbeing is a leading driver of staff sickness and turnover.
Currently, the manual and sporadic salary advances some employers offer does little to solve this. Most people who need an advance are too private or proud to ask for them, and the approval process can be impacted by personal feelings and unconscious biases.
On-Demand Pay Pros and Cons
On-Demand Pay Pros (For Staff)
Avoid Debt: Without adequate savings, many people turn to debt when unexpected costs arise. ODP is significantly more affordable than credit, approximately 99% cheaper than a payday loan, and is totally debt-free.
Easier Budgeting: Many workers find it easier to budget over shorter time periods and withdraw money as direct debits come out, rather than managing a single pot of money across a whole month.
Available to Everyone: Unlike most financial products, ODP is available to all employees for the same cost; regardless of their credit history or relationship with their line manager.
On-Demand Pay Pros (For Employers)
Reduce Staff Turnover: Employees are less likely to change jobs and will be reluctant to move into roles where they cannot be paid on demand. Some employers have reported reductions in staff turnover as high as 50%.
Recruit Staff More Quickly: If a candidate has a choice between two very similar jobs, but one offers ODP, they are likely to choose this over one that does not.
Fill Shift Rotas: Staff are far more motivated to work overtime and extra shifts when they get paid for them sooner. Some employers have reported more than 60% increase in shift-filling even when paying the same hourly rate.
Reduce Absenteeism: Studies have shown that on-demand pay reduces absenteeism by an average of 13%, as workers are less stressed about their finances and reminded more frequently of the financial reward for their work.
On-Demand Pay Cons (And How to Avoid Them)
No Money Left On Payday: Reputable providers will work with you to set usage caps, typically between 40% and 50% of gross pay, to strike the best balance between flexibility and stability.
Low Awareness: The last thing you want is for staff to be unaware they can access their pay on demand, and to still be using short-term credit. While your provider should support you with communications, it’s up to the HR department to help spread the word at launch.
Unprotected Money: It’s highly recommended that you ensure your provider holds employee money in an FSCS-guaranteed bank account.
Adoption of On-Demand Pay UK
Why Has On-Demand Pay Become More Popular Recently?
Cost-Of-Living Crisis: The current economic environment has encouraged many organisations to take the financial wellbeing of their employees more seriously.
Great Resignation: A hot labour market means its relatively easy for workers to find alternative jobs, which leads to higher rates of staff turnover and more interest in solutions that can reduce this.
Longer Pay Cycles: Weekly pay used to be the norm but, over the last 30 years, most organisations have switched to monthly pay. This long gap between paydays makes ODP a more compelling proportion.
New Technology: On-demand pay simply wasn’t possible ten years ago. New innovations mean that it can now be enabled easily and without impacting the cashflow of the employer.
The Expectation of Flexibility: Everything from boxsets to food is now available on-demand, and workers increasingly expect the same flexibility across all areas of their lives.
What Do UK Workers Think Of On-Demand Pay?
ODP has proven very popular with workers in recent years and enjoys a much higher take-up rate than almost all other employee benefits. It is common for over 50% of staff to use it at some point.
Nine out of ten UK workers would like access to it and, as reported in the Guardian, a majority of British workers would prefer ODP to extra paid holiday.
Amongst the HR community, there is a growing consensus that, over the next 12 months, ODP will, in some industries, shift from a ‘nice-to-have’ to a ‘must have’.
What Organisations Already Offer ODP?
Many household names now offer on-demand pay including, but not limited to:
Amazon
The NHS
Amazon
Local councils
Capita
Tesco
Green King
Hilton
McDonald’s
Subway
Walmart
Co-op
And many more…
The Details
How Does It Work?
When an employee advances some of their earned income before payday, the ODP platform provides the cash to enable this. Then, on payday, this amount and any fees are recouped from their wages before they reach the employee. Thus, the employee simply receives their pay as normal, minus any they have accessed on-demand earlier in the month.
The on-demand pay provider recoups any income advanced before payday one of two ways:
Automatically
When an employee signs up to use ODP, their bank details are changed to an individual splitting account the provider sets up for them. When payroll is run, their income enters this account and, in a matter of seconds, any income advanced before payday is automatically recouped, and the rest is forwarded straight onto their personal bank account.
Manually
The provider shares a file of all income advances made before payday with payroll, and the team deducts these post-tax; sending a lump sum payment to the provider. While this method does require some work from payroll, this process is not dissimilar to how they would manage a cycle-to-work scheme.
On-Demand Pay App
Most people use the service through an on-demand pay app. Some providers also offer web apps and SMS services as an alternative for workers who have lost their phone or who are less tech-savvy.
It’s also worth noting that some providers offer on-demand pay as an API so that it can be embedded into employee experience or workforce management apps under any brand.
On-Demand Pay Fees
On-demand pay fees come in two parts:
An annual on-demand pay fee to the employer for providing the benefit to staff
A low, ATM-style fee per advance for the employee (typically around £2 to cover the liquidity costs of the provider)
On-Demand Pay Regulations & Government Guidelines
Any ODP provider should be regulated by the Financial Conduct Authority (FCA) in their own name. As they will also be dealing with sensitive payroll information, it is also recommended that they are fully accredited in regard to information security and registered with the Information Commissioner’s Office.
Other than the above, we simply recommend following procurement best practices; like speaking to references and choosing a company with a reputable client list. You can find a list of such providers, and a comparison of them, in the final section of this report.
The (Very) Brief History of On-Demand Pay UK
On-demand pay was created in America to combat rising payday loan use and to help traditional employers match the pay cycles of gig companies like Uber.
ODP is now used by nearly 20% of all American workers; a figure that rises to almost 100% in industries like retail and hospitality. Notable users include McDonalds, Walmart and Subway.
Because the standard pay cycle in the UK is monthly, compared to twice a month in America, UK companies are now adopting it at an even faster rate than those in the USA.
Buyers Guide
On-Demand Pay Providers
There are three established and reputable on-demand pay providers in the UK.
Level
Wagestream
Salary Finance
In addition, a very small number of payroll providers also offer ODP alongside their other services.
Key Considerations:
There are five key things to look out for when choosing an on-demand pay provider:
Keep credit and pay separate
Chose a holistic approach
Make sure your staff’s savings are safe
Keep extra work to a minimum
Be very sceptical of ‘free’
Keep Credit and Pay Apart
The UK government, while optimistic about ODP, specifically warn against providers who bundle it with a credit product. This creates a “potential conflict of interest” where there could be an incentive to reduce financial wellbeing and increase demand for the credit product.
When offered in line with UK government guidance, ODP is an antidote to credit, not a driver of it.
Opt For A Holistic Approach
The same UK government report also stresses the importance of providing ODP as part of a holistic wellbeing tool. It is crucial that efforts are taken to increase savings and help with budgeting alongside offering more flexible pay options. The total of these is far greater than the sum of the individual parts.
Keep Staff Savings Safe
Some financial wellbeing providers store employee savings in online electronic money accounts. We would strongly advise against this.
Not only do these accounts pay no interest on savings but, more importantly, they are not FSCS-guaranteed. If the provider was to collapse, your employee’s money would not be guaranteed by the government in the same way it would be with a high-street bank or Level.
Flexibility & Ease
We passionately believe that salary-linked services help turn payroll into a superpower; shining a light on the invaluable work these teams do and making their work more useful for fellow employees.
But, some ODP systems can be rigid and add more work for your payroll team. We would strongly advise you to find a solution that’s flexible and works for you, not the other way around.
Look Out For Free
Be very careful with providers willing to offer on-demand pay without an employer fee.
It’s important to ensure that the commercial interests of the provider and the financial health of the end users (your staff) are aligned. If a provider’s sole source of income is usage fees, it is inevitable that they will come under pressure from shareholders to increase usage.
Employers should look for providers whose commercial model generates sustainable income from overall engagement with a suite of services that improve a user’s long-term financial health.
About Level
High tech. Higher standards.
The UK’s most ethical & advanced on-demand pay provider
Pay is the fundamental link between employers and employees. This is why on-demand pay is so powerful. It also means you need to trust the people and technology you’re dealing with it.
No Cross-Selling
We are the only provider in the UK that doesn’t try and upsell your employees anything else like phone insurance, and we don’t offer any credit products either. You’ve paid for on-demand pay, and that’s what your employees get.
No Growth At All Costs
We chose to raise investment from a client instead of a VC to ensure we can grow sustainably. This means no unethical algorithms or targets to increase usage.
No Cutting Corners
Because we co-created Level with a publicly traded, blue-chip company, we’re regulated like one. But, we still offer the service quality of a much smaller company.
Conclusion
We believe strongly that ODP is a better way to pay for employers and employees alike, but we appreciate that finance and new technology can often feel confusing. We hope that this report has helped demystify it for you somewhat.
We live and breathe this every day so, if you have any questions at all, please don’t hesitate to reach out by emailing [email protected]. We obviously hope that, if you do decide to start paying on demand, you choose us. But, even if you don’t, we are genuinely still here to help. We are evangelical about this technology and, however you offer it, we see that as a win for you, your workers and the industry.
Please don’t hesitate to reach out and say hello.
