When a former participant in a Stanford executive program invited me to join the advisory board of PayActiv, a company providing employees access to their earned wages between pay periods, I had no idea about the pressing need for what has become a growing industry and movement. Yet giving people access to their money more quickly represents one small but important step to reducing an epidemic of employee financial stress.
Like all forms of stress, financial stress negatively impacts people’s psychological and physical health, an issue very much on my research agenda. Moreover, it adversely affects employee turnover, absenteeism and presenteeism. In fact, one in three employees say that personal finance issues are a distraction at work.
Here’s why human resources departments should embrace the movement to make every day a payday.
Let’s Look at the Problem
Unless you are a day laborer or a participant in the "gig" economy—in other words, if you are a regular employee—odds are extremely high that you are going to be paid for your work some time after you did it. According to the U.S. Department of Labor, only nine states require weekly pay, and some of those states have exceptions. In other states, employers can pay people every two weeks, semi-monthly (like my employer, Stanford) or even monthly.
Consider the fact that in the second quarter of 2019, median weekly earnings were $911 for full-time wage and salary workers. With seven days in a week, that means the median worker is earning $130.14 per day. If someone is paid every two weeks, they will have accrued but not been paid earnings of around $1,301 (minus tax withholdings and deductions) after 10 days.
The fact that people are paid what they have earned some time after earning it may not seem like a big problem, but data shows many people in the U.S. are in a financially precarious position. The annual survey conducted by the American Psychological Association consistently finds that money and work are the two leading sources of stress, with these levels only rising. Even among employees earning more than $100,000 annually, PwC’s 2017 Employee Financial Wellness survey shows that 28 percent found it difficult to meet household expenses each month, and 58 percent consistently carried credit card balances.
The Current "Payday" Industry Is Enormous—and Wildly Expensive
The payday lending and "check cashing" industry arose in response to people’s needs for small, presumably short-term loans to tide them over until they receive their next paycheck. And business is booming. There are now more payday lenders in the U.S than McDonald’s or Starbucks. A study by the Consumer Financial Protection Board found that almost half of the borrowers had done 10 transactions, and the median fee was equivalent to an annual percentage interest rate of 322 percent.
Meanwhile, Flexwage estimates that people are paying $32 billion in bank overdraft and insufficient funds fees and $6 billion in lending fees at U.S. pawn shops. Along with the $9 billion in estimated payday lending fees and high interest rates, that’s close to $50 billion being paid each year by some of the poorest and most financially stressed Americans. And it turns out this is something that should concern HR managers, too.
Financial Stress is a Giant Problem—for Employers
PwC’s survey reported that employees who were worried about their finances were five times more likely to be distracted at work and nearly twice as likely to spend three hours or more at work dealing with financial matters. Stressed employees were also twice as likely to miss work and more inclined to cite health issues caused by financial stress, the survey showed.
This massive productivity and engagement cost is one reason that a 2019 Bank of America survey found more than 50 percent of employers are now offering financial wellness programs as an employee benefit, a doubling in just four years. Such programs can include education about budgeting, direct deposit of wages to a bank to avoid check cashing fees, retirement savings plans (which less than half of employers offer in any form), income smoothing for people in jobs where pay varies significantly over time and programs to have employees automatically deposit a set amount or percentage of their pay into a savings vehicle.
One Simple Step Toward a Solution
These are all helpful options, but there’s a better solution: Simply offering employees quicker and easy access to their money will go a long way toward increasing productivity, improving retention and even attracting more applicants (who won’t need to deal with the unnecessary added financial stress that comes from dealing with predatory lenders).
Most earned wage providers, such as Flexwage, Instant, and PayActiv, sign up employers—who, in many cases, pay the nominal fees (which vary by vendor and specific customer but are typically on the order of 3 percent) on behalf of their employees. Employers then offer the option, which often includes a debit card and no-fee access to ATMs, to workers.
To be clear, this will not solve all of your employees’ financial problems. For instance, if people aren’t earning enough money, providing better and quicker access to an inadequate wage won’t eliminate their financial stress. If people are doing a poor job of financial planning and budgeting, accessing their wages more readily won’t suddenly make them better financial managers.
But it just might reduce at least some of the overdraft fees and high interest costs that make their precarious financial situation and resulting stress even worse. And reducing financial stress, by any amount, can only benefit workers and their employers.
Image: Creative Commons
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