A Brief Introduction to EWA

Earned Wage Access (EWA), also known as real-time pay, on-demand pay, or early wage access, allows employees or contractors to access their pay before the designated pay date. In many ways, it is a leveraging of EY’s estimate that approximately $1 trillion is accrued in employer payroll accounts on any given day. As they see it, paying people before a designated pay date offers employees access to this resource in a way that is cost-efficient. It is also a way of paying employees who don’t fit into the traditional paradigm.

Rising numbers locked out of banks

EWA first became popular as a way to pay the rising number of people without a bank account. Currently, 1.7 billion people do not have access to traditional financial services making traditional payments via checks or electronic transfers irrelevant. While the idea of not having a bank account may shock some people, the reality is that for some, it is not a choice. Apart from the complex and large volume of paperwork it requires, there is also the issue of verification of identity, which for various reasons many people do not possess. Due to rising house prices and perhaps a cultural shift, there is also a new trend towards young adults staying at the family home for longer. A recent article from Acuant looked at financial inclusion and found that 21% of young adults aged 20-34 in the UK live with their parents. That equates to 2.7 million people who are unlikely to be named on utility bills, may not have a credit card, pay rent, or have a mortgage. All of which were historical reasons for opening a bank account. Meanwhile, other research highlights a different, more concerning reason for not having a bank account. One report from the FDIC found that 5.4% of U.S. households, or approximately 7.1 million homes, were unbanked because they did not have the minimum balance to open one.

EWA is also a response to the explosion of payday loans

Another major reason for EWA’s rise is the high volume of payday loans that people are using to bridge to their next paycheck. In Are OnDemand Paychecks the Way of the Future, we looked at the fact that roughly 12 million Americans use payday loans each year. Annually a whopping $9 billion is paid in payday loan fees. The global payday loans market size was valued at $32.48 billion in 2020 and is projected to reach $48.68 billion by 2030, growing at a CAGR of 4.2% from 2021 to 2030. Some champion ESW as a means to prevent people from having to borrow at these high-interest rate loans.

How does EWA work?

EWA means an individual can receive a portion of their pay before the designated pay date. And this is what is critical- it is only a portion. Most of the salary is still paid at the end of the month. It is not an advance either – you can only draw down money already earned. Because it is not a loan, there is no interest to pay, and typically it incurs a small admin fee which is made clear up-front.

EWA’s popularity exploded during Covid-19. In the US, big names like Walmart, McDonalds, and Uber offer EWA. A recent report from Visa shows that 95% of surveyed workers are interested in working for an employer who provides EWA, and 79% would be willing to switch to an employer who offers EWA.

There are 2 types of EWA – employer-sponsored or direct to consumer.

• Employer-sponsored - the employer contracts with an EWA provider whose technology is integrated with the employer’s payroll system.
• Direct to consumer- the EWA provider offers services directly to the employee and recoups funds from the employee’s bank account after payday.

There are many states level laws around direct deposit. For example, New York and California, only permit employers to pay wages by direct deposit with the written consent of the employee. Currently, 7 states have attempted legislation on the matter: New Jersey, New York, South Carolina, Georgia, Utah, Nevada, and North Carolina. As it becomes more commonplace, we can expect to see more regulations is the view of some.

EWA and taxation implications for employers

Tax rules and withholding tax rules vary considerably from jurisdiction to jurisdiction, and tax law can be updated and amended quite often. Therefore, it is important that organizations seek specific advice before implementing any new payment structure such as EWA.

The requirement for an employer to withhold payroll taxes or pay over employer taxes usually arises when the employer pays the employee. When considering EWA, we are looking at the income that has been earned but has not yet been paid by the employer. EWA essentially involves a third-party EWA provider who makes an advance regarding the salary earned but not yet paid. As the employer is not actually making a payment to the employee, generally, there is no requirement for the employer to perform any withholding then. Tax will, of course, be applied via payroll when the earned salary is processed via the payroll in the normal course of events. If the EWA structure involves the funds flowing directly from the employer to the employee rather than via a third-party EWA provider, this may be very different, and an employer obligation regarding withholding, filing, and reporting may well arise. It is essential to consider the exact structure carefully and the specific rules of the location(s) involved.

5% of large US companies currently offer EWA, most of whom operate an hourly rate workforce. Industry experts predict that the number will increase in the coming years. Organizations planning to offer EWA should start to look at the legislation and the tax implications for both employer and employee. Payroll teams ought to begin looking at how they will manage the deployment of funds, especially if they oversee payments in multiple jurisdictions, each with local rules and regulations. It might also be time to evaluate how you provide employees with assistance with managing their finances. Financial wellness is a fundamental component of programs that aim to enable people to pay their bills and day-to-day expenses without using payday loans.