Is an earned wage advance a good idea?
If you’re struggling to make ends meet until payday, then taking an early chunk out of your earned wages might seem like a sensible solution. But is it wise to offer your employees an earned wage advance? Or does it just encourage them to get into perpetual debt?
Financial wellbeing is just as important as physical or mental wellbeing
You might wonder why an employee’s financial wellbeing is your responsibility. Well, technically, it’s not your responsibility. But you still want your employees to be happy and healthy – if not because you’re a good person, then at least because employee wellbeing is the solution to poor productivity.
When I last spoke to Dr Shaun Davis, he told me that financial health is just as important as physical health and mental health.
“Each one makes up one point on the triangle” he told me. “Your financial health has an impact on your physical health, which has an impact on your mental health, which has an impact on your financial health”
As an employer, you don’t have to care about your employees’ financial wellbeing. But if you’re a decent human, then you should. And it could help you nurture a more productive workforce.
Perpetual short-term debt fuelled by payday loans
There are lots of elements that contribute to poor financial health. One of these, is perpetual short-term debt. And often, this is fuelled by payday loans.
If we built a time machine and hopped back just a few years, we would land in a world where payday loan companies like Wonga thought it was OK to charge up to 5,853% APR for a short-term loan.
These short-term loans were sold as ‘emergency funds for life’s little surprises’. But in reality, their catchy adverts and memorable gimmicks were more likely to entice vulnerable people into perpetual short-term debt, with the promise of fast, easy cash.
Many of the big players like Wonga went bust, after getting crippled by compensation claims from people who got trapped by unaffordable and irresponsible loans. Yet many payday loan companies are still freely operating, and it is thought that more than 8 million people in the UK are suffering serious ‘problem debt’.
Offering your employees an ‘earned wage advance’ could be an alternative
The idea of giving employees an advance on their next wage isn’t a new one. But as stricter regulations begin to throttle the more aggressive payday loan companies, the concept of the ‘earned wage advance’ is growing in popularity.
I’m not going to go into the detailed logistics of how an earned wage advance works, because there are lots of ways it can work. But essentially, the idea is that employees can access the pay they have already earned, before their scheduled pay date.
This is definitely more preferable to taking a payday loan and the buckets of interest that come with it. But I found myself wondering if an earned wage advance might just encourage employees to only plan for the short-term, in a constant loop of living on next month’s budget.
A low-cost way of helping employees budget
“Some people don’t get along with a monthly salary” says Abhishek Abgrawal, director of Access EarlyPay. “We don’t turn our judgement on people who are paid weekly, so why do the same for people who sometimes want to access some of their monthly salary a little earlier?”
Abhishek has a valid point – loads of shift workers are paid weekly, and we don’t think twice about this. And for some people, a weekly wage is easier to budget with. So in that respect, a wage advance could be a good way to help people on a monthly salary, to plan for fluctuating short term expenses, without turning to more expensive options.
“With payday loans, the interest rates are ridiculous, with debt compounding month-on-month” says Abhishek. “People who use payday loans are often stuck paying back only the interest on the loans they take out, while the debt remains hanging over their head. A wage advance from the employer lets employees access the money they have already earned, without any interest at all.
Wage advances encourage employees to take extra shifts
But giving employees early access to their earned income seems to have potential as more than just another form of payday lending. And Abhishek tells me that since launching EarlyPay, he has noticed that it actually works as a tool to motivate contingent workers to take more shifts.
“Before EarlyPay went live, only 37% of shifts were taken on by the workers who started using EarlyPay” he tells me. “Within two months of going live, this figure rose to 44%.”
Abhishek says that workers are more likely to volunteer for extra shifts, because they have faster access to the financial reward. A worker who wants to take their kids to the cinema on Sunday, may well be able to take an extra shift on the Friday, and get paid for it in time for the big day out.
The risks still exist, but you can take steps to mitigate these
While you can’t force your employees to budget and plan, it doesn’t mean that a wage advance is necessarily a bad idea. Some experts say that you can enjoy the benefits, while taking steps to mitigate the risks.
“It’s good to be able to help staff when they need it” explains seasoned HR expert Sue Andrews, Fellow of the CIPD. “Financial security is an important factor for employees, who are likely to be less productive if they’re distracted by money worries. But it’s definitely a good idea to have a formal policy in place so that things are done properly.”
Sue says that staff need to be aware of the maximum number of times they can make a request to draw part of their salary early, in order to avoid a culture where an individual asks for an advance every month. She also says that allowing employees to repay the advance over a few paydays can be a good way to avoid them constantly facing the same issue each month.
A wage advance can help, but make sure you offer additional support
I still hold a degree of healthy scepticism when it comes to whether or not you should offer your employees the option of a frequent advance on their salary. And I certainly don’t think it’s a quick-fix solution to poor financial health. But I am certainly starting to see it in a slightly more positive light.
Compared to a payday loan, a wage advance obviously carries fewer fees, is less likely to impact your credit score, and is easier to sort out if you land in trouble. Plus, the idea that a wage advance offers a more instant reward for contingent workers taking extra shifts, is a very nice one indeed.
On balance, I think that the option of an earned wage advance is a positive benefit to offer your employees. But remember to be clear about limits and guidelines. And if you’re serious about promoting positive financial health, make sure your employees have easy access to clear, practical educational material that supports responsible budgeting, and promotes a stable financial future.
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