Council Post: Why Wage Policies Need To Change

Ram Palaniappan, CEO & Founder at EarnIn.

Deuteronomy 24:15 states, “You shall pay them their wages each day before sunset, because they are poor and their livelihood depends on them.”

As recession fears and market volatility persist, over 60% of U.S. workers still wait for their biweekly or semimonthly paycheck, all while 63% of Americans live paycheck to paycheck. You may ask, so what? Well, periodic paychecks are common now, but it wasn’t always this way.

As someone working to expand earned wage access, I believe that holding back or preventing employees from accessing their wages after they have worked is a violation of basic rights. Common sense, religious texts and ethical codes have told us this for centuries. Deuteronomy, one of the oldest biblical texts in the Western world, tells us what society accepted previously and what it did not—and society did not accept longer pay periods then. So why do we accept that now?

What’s Holding Back Quicker Access To Wages?

There’s no technological argument for why paydays can’t be more often. A number of technological innovations have contributed to the ability for employees to get faster, streamlined payments—from the development of automated time and attendance systems to electronic automation of paychecks for employers.

The answer lies with just how established the status quo is and the legal environment in much of the U.S. Most states don’t require anything more than a monthly or bimonthly payday, while some don’t mandate any kind of paycheck cadence by employers. The current payroll cycle is indicative of the balance of power: It’s very much in favor of the employer. Over time, our laws have protected this practice and solidified it.

How Earned Wage Access Can Help Employees—And Employers

With or without employer buy-in, earned wage access (also known as on-demand pay or instant pay) can be valuable for employees who want—and often need—quicker access to the money they’ve earned. In a highly personalized, on-demand world, it enables employees to get their money before the end of their payroll cycle, sometimes weekly or even daily.

The principle behind it is simple: People should have access to their pay as they earn it. Enabling EWA frees many workers from the traditional pay cycle. According to a Financial Health network survey, EWA users totaled over 50 million in 2020. This, coupled with increasing interest in financial wellness benefits from employees, poses EWA as an increasingly valuable benefit both to employers and employees.

Potential outcomes, for both the employee and the employer, include:

• Paying bills on time without compounding interest and reducing debt faster.
• Avoiding unexpected bank fees and overdraft charges.
• Improving employees’ financial circumstances by giving them greater financial flexibility.
• Reducing financial anxiety.
• Contributing to employee retention.

There is a common belief that periodic paychecks act as a form of forced savings, and thus, increasing the frequency of paychecks will encourage people to spend more and save less. However, this belief is unfounded; according to a study conducted by researchers at Columbia Business School and Copenhagen Business School, the psychological response to payday shows that consumers are spending more on payday. The lump-sum payment results in consumers feeling like they have the ability to spend more.

Some companies, such as ride-hailing services, provide immediate access to earnings through their payout systems. Despite these examples, there is often a question about how traditional systems need to change to make EWA work. One way would be to modify existing payroll systems to move away from the “batch-like” nature of current payroll practices. Another barrier to the adoption of EWA is interest earned on wages before they are paid. This acts as a financial disincentive to move to EWA. Fortunately, technology continues to evolve around these limitations.

It’s Time To Challenge The Status Quo

Many Americans often have to delay everything from grocery shopping to medical care while they await their delayed income during the biweekly pay cycle. Bill Simon, former CEO of Walmart U.S., notably pointed out that “sales for those first few hours on the first of the month are substantially and significantly higher.”

It’s clear to me that it’s time for all of us—business leaders and employees—to evolve our collective thinking and policy around wages. Paying our employees isn’t something that should happen weeks at a time; it’s far too important.

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