21 September 2021
Samantha Johnson LLB(Hons) ChMCIPPdip, CIPP policy lead explores the intricacies of pay on demand
Pay on demand (POD), earned wage access, earned salary access schemes – whatever the label, there is growing popularity in providing employees with the tools to access pay before their contractual pay day.
Many payroll professionals will have been involved in the transition of weekly pay dates to a monthly pay date. The concept of reverting to a more frequent pay day is therefore, understandably, slightly terrifying.
This article provides an overview of POD to give payroll teams an insight into this new employee offering.
POD has both supporters and opponents – in both cases the arguments are based on the ethical implications of the solution.
Supporters argue that POD offers a sound alternative to the high interest rates of pay day loans, overdrafts and credit cards. The facility also gives an element of control back to the employee and could protect the employee’s right to privacy when they need additional funds outside the normal pay cycle.
Opponents suggest the solution doesn’t tackle the root cause of poor financial health and POD is merely a sticking plaster to bad financial management. It is argued POD exacerbates the situation rather than improves it, with hardship loans, pay reviews or financial education better placed to support struggling employees.
Both arguments have weight, which is why it is essential that employers considering these solutions assess whether POD is appropriate for their workforce.
There are several products in the market that offer POD. The basic concept is that the employer signs up to pay a licence fee so their employees can access a platform that gives them visibility of their ‘earned pay’. In practice, a monthly paid employee who is paid on the 31st could log in to the solution on 14th of the month and see the (estimated) net pay earnt between 1st and 13th. If the employee requires early access to some, or all, of that pay before their standard pay day, they can pay a small fee (usually around two pounds) to draw on their wages immediately.
Employers can opt to pay the transaction fee on behalf of employees, removing the cost to the employee. Some solutions also offer the ability to impose thresholds or limits on the value or the number of drawdowns between pay periods. The decisions that are made by the employer provoke more ethical questions – to what extent should employers play a part in their employees’ personal financial affairs?
The main approach to payment is that the provider makes the payment directly to the employee, whilst the employer holds the obligation and commitment to repay the drawdown amount, usually on the contractual pay day. This employer commitment means that data accuracy is key.
There are also financial risks associated with POD. If an employee draws down on wages they are not entitled to (for example, if there is a delayed notification of an employee leaving) the employer risks overpaying the employee a net amount. If they are unable to recover this amount, the employer would then need to gross up this payment through the payroll to ensure the correct tax and National Insurance is applied. Late leavers, amongst other errors, aren’t uncommon in payroll. However, the delay built into the payroll cycle often mitigates the likelihood of these errors occurring. Data accuracy, system integration and process controls are therefore an integral part of any POD process.
The impact on Real Time Information (RTI)
The question – are there RTI implications of POD? – is inevitable from any payroll professional.
Since RTI’s introduction, payroll teams have ensured the full payment submission is submitted on or before pay day. Does a POD payment constitute a pay day? Her Majesty’s Revenue and Customs (HMRC) has been remarkably quiet in this area since POD reached UK shores several years ago.
It is impossible to confirm one way or another, given the number of POD providers and variations in set-up available to consumers. The CIPP advises that employers looking to implement POD should interrogate the scheme’s arrangements and be satisfied that all PAYE (pay as you earn) obligations remain fulfilled. However, it is worth noting there are many employers that have been successfully offering POD at scale to their employees for some time.
The future of POD
The array of benefits available to employees will continue to grow as the employment market changes. Employee attraction and retention should be at the heart of any successful people strategy. It will be up to the employer to review POD alongside other employee benefits, to determine if they are the right fit for the employees’ needs and the company’s culture. Payroll professionals are perfectly placed to lead and support these initiatives as part of payroll’s growing strategic role in the workplace.
Featured in the October 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.