On-demand pay: What is it, how does it work, and pros and cons

To attract and retain the best talent, it’s increasingly crucial to offer practical, useful benefits — especially if your team is dispersed.

One lesser-known but significantly helpful benefit is on-demand pay. It allows employees to withdraw their paychecks when they earn them, rather than waiting until the traditional payday.

In this article, we’ll explain how on-demand pay works, the pros and cons of offering it, and what to do if your team is spread across the globe. So let’s jump straight in.

What is on-demand pay?

On-demand pay is a supplementary benefit that lets employees receive their earned salary or wages before their scheduled payday. It’s also known as earned wage access, instant pay, or daily pay.

It offers flexibility for employees, as they can access their funds when they earn them instead of waiting. This can help your people cover urgent expenses instead of racking up credit card debt or dipping into their emergency savings.

What are the benefits of on-demand pay?

On-demand pay offers benefits for both employees and employers. These benefits feed into each other, too, strengthening the employee-employer relationship.

For employers

By offering on-demand pay, employers can attract and retain good talent and show their appreciation for employees. Here’s what that looks like:

• It demonstrates employer investment. The flexibility of on-demand pay indicates your investment in your employees’ financial wellbeing. This improves company culture and morale.

• It helps retain top talent. If your employees know that they can receive their pay more flexibly, it creates a better employee experience. This makes it more likely that your top people will want to stick around.

• It helps boost engagement and productivity. Appreciated employees are more productive and engaged as they feel valued. They’re also less stressed about financial issues, as they know they are covered. The more you can do to help reduce external financial stressors, the more focused your people will be. 

For employees 

• It creates a sense of financial security. Employees know that once they earn their pay, they have access to the money immediately. Not having to wait for their money, especially if bills are due, gives them a feeling of financial security — especially if they live paycheck to paycheck.

• It reduces financial worries and stress. Employees can access the money they earn more easily, reducing financial stress. They don’t have to track their payday alongside their bank account to make sure the timing of their payment happens before they need it.

• It helps employees avoid late fees and interest. Your employees don’t have to take out high-interest loans, such as payday loans, or go into credit card debt to cover unexpected expenses.

What are the challenges of on-demand pay?

The benefits of on-demand pay come with some trade-offs, including:

Potential pay errors

An on-demand pay system can increase the complexity of your payroll process, leading to potential errors in wage calculations. Employees may get overpaid and spend that money before you can fix the error.

It also makes it harder to track variable amounts, like overtime, bonuses, deductions, and commissions.

To mitigate this, it’s advisable to use an automated payroll system, like Remote. Our platform calculates what exactly is owed, including all variables, in line with all the relevant employment laws in your team member’s location.

Learn more about how our payroll platform saves time and removes errors.

Potential tax errors

Tax withholding can also become more complex, with on-demand pay making it harder to calculate withholdings accurately.

Taxes aren’t necessarily withheld by on-demand payment systems, so you may unintentionally fail to withhold the proper tax amounts.

Again, Remote’s payroll platform can help. It ensures that all withholdings are calculated correctly in line with payroll tax laws in your team members’ locations.

Potential financial mismanagement

Employees may spend their earnings prematurely, leading to financial instability. Having the money available for longer and in irregular intervals can increase this temptation. Even financially responsible employees can become reliant on early paydays. 

If you ever need to end your on-demand pay, your employees may have a rough adjustment period. Similarly, if they get a job at a different company without on-demand pay, they’ll have to readjust how they manage their paycheck.

Potential cash flow issues

Your business may experience minor cash flow issues if all employees are requesting their paycheck immediately. This can make it more difficult to budget effectively, and you may even have to hire more administrative staff to manage the program.

Transaction fees

In some cases, employees may have to pay transaction fees to receive their payment early, which can be frustrating. These fees can also harm them financially if they need the payment for an emergency, like a medical bill. 

This can also cause resentment and negatively impact employee engagement and morale.

Tax consequences

In some places, such as the US, your employee might face additional tax consequences. If they receive credit for earning income and obtain control over it but haven’t yet physically received it, that income may be taxable due to constructive receipt.

On-demand pay falls under constructive receipt since the employee can withdraw it before they physically receive their paycheck. That means the employee might owe taxes on wages they haven’t even deposited in their bank account yet.

This may not matter throughout most of the year, but it can have tax consequences near the end of the year.

For instance, say your employee accrues wages for work performed in the period ending December 30, 2024. The payday for this work is not until January 11, 2025, but on-demand pay gives them instant access on December 30.

That employee may owe taxes on that amount, even if they wait until payday to receive their full paycheck. If on-demand pay isn’t available, they’ll likely avoid that tax consequence.

How does on-demand pay work for global teams?

If your organization has people across the globe, you must deal with additional layers of complexity, such as:

• Legal differences. Taxes and regulations vary between countries and localities, making it even more challenging to withhold the proper amount. 

• Foreign banks. Banking regulations may also impact paycheck access, as banks may have different hours, and other countries may observe holidays your own country does not.

• Cultural differences. Even local cultural factors around work, money, and finances can play a role. For example, some cultures may be more traditional regarding wages and more resistant to implementing a system that allows “early” pay access.

As a global payroll expert, Remote can manage this for you. As well as calculating the right amounts and ensuring full compliance, our local, in-house experts can advise you on the most suitable way to proceed in each location. This saves you significant time and resources, and ensures that your people remain happy and productive.

Managing on-demand pay with Remote

On-demand pay lets your employees use their hard-earned money earlier, which demonstrates your appreciation for them and boosts their productivity.

That said, flexible access to paychecks brings about additional challenges. Budgeting and cash flow management become more complex, and you run a bigger risk of payroll and tax errors.

Remote removes these obstacles through automated compliance, in-depth tracking of payment information across your workforce, and experienced support and advice.

To learn more about how it works — and to see how else we can remove all your payroll headaches — book a demo with one of our friendly experts today.

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