Salary advance: What employers need to consider

It’s a competitive recruitment marketplace. Any perks or benefits employers offer on top of salary or working conditions will put their business in a better position.

Perks and benefits might even be used in lieu of a pay rise to increase employee retention.

One perk available to nearly all employers is a salary advance scheme—the ability for employees to access a part of their salary before payday.

As employment perks go, it can be attractive to both employees and employers.

However, there are often significant misunderstandings and assumptions about how it works, and what it offers.

The reality is that it’s more accessible and straightforward than you might think.

Here’s what we talk about in this article:

• What is a salary advance scheme?
• How does a salary advance scheme work?
• Salary advance benefits for employers
• Salary advance benefits for employees
• What to consider when offering salary advances
• How to offer salary advances
• Final thoughts on salary advances

Jonathan David, the founder and CEO of FlexEarn, provides expert insight throughout.

What is a salary advance scheme?

Picture the scene. It’s 2am and one of your employees has a flooded kitchen. The next morning, an emergency plumber requires £200 before a spanner is pulled out of a toolbox. Sadly, the employee hasn’t got the cash.

Salary advance schemes offer a solution.

Sometimes called earned wage access or on-demand pay, this is a payroll scheme that allows the employee to access part of the salary they’ve already earned ahead of their usual payday.

“It can also be about flexibility,” says David. “For example, if there’s a two-for-one meal deal at a local restaurant on a Friday, and the employee gets paid on a Monday, they can save money using salary advance scheme.”

Although you could pay this advance from your own coffers, employers usually partner with a third-party provider to offer such a scheme. Sometimes these are called earnings-on-demand providers.

It might seem that the salary advance is a form of credit for the employee, in that it’s money provided ahead of payment.

But while a knee-jerk reaction is to call it a payday loan (or a payroll loan), it’s radically different, for several reasons:

1. The employee can only access a proportion of they salary they’ve already earned.
2. The salary advance is automatically repaid in full from the employee’s next salary payment, and this is outside their control.
3. The advance is always repaid within a month or less, assuming a monthly payroll.
4. No interest is typically charged to either employee or employer on the advance.

Therefore, it’s not classed as credit in any traditional sense, and the employee doesn’t face a credit check or an affordability test.

This is not to say salary advance schemes are reckless.

“Employers can monitor usage of the scheme,” says David, talking about FlexEarn. “They can intervene at any time if they think there are problems with debt, using messaging we already have prepared.”

He mentioned that FlexEarn has a referral partnership with StepChange, the UK’s largest debt charity. Employees can be offered help from an adviser.

A fee is charged by the salary advance provider, sometimes as a small percentage of the advanced amount or as a small set fee. The employer can choose to absorb this fee each time, making the advance entirely without cost for the employee, or they can add it to the salary deduction.

Salary advance providers can be generous in this way because the risk they take on providing the loan doesn’t revolve around whether the individual can (or will) repay.

Instead, their chief concern is that the employer will stay in business—or at least until the payroll run is completed and the salary advance is paid back.

Employers face a credit check when setting up the scheme, in the same way they might when working with any new supplier.

How does a salary advance scheme work?

How the scheme works might be described as surprisingly simple for both employers and employees.

How salary advance works for employers

Because the salary advance provider needs to know how much an employee has worked in order to advance appropriate amounts, employers work with salary advance providers to integrate with both time and attendance software, as well as the payroll solution.

“With FlexEarn there’s usually a half-hour setup call,” says David. “Although this depends on the complexity of the business, such as the number of employees.”

Both initial and ongoing integration can be digitally automated if the provider offers compatibility with your software, or it can be handled manually by exporting a file and sending it to the salary advance provider via secure channels.

There isn’t usually a setup charge or ongoing fee required from the employer.

Employers can roll out the scheme as a default offering available to all employees at all times. However, it could also be offered as an opt-in scheme—albeit at the cost of slightly increased admin.

Ongoing monthly admin work revolves around the employer and salary advance provider sharing details of employees who have used the scheme that month, as well as notifying the salary advance provider or any new joiners who wish to be enrolled on the scheme.

How salary advance schemes work for employees

From the perspective of the employee seeking a salary advance, they’re directed by the employer to an online service or app to sign-up and request the advance.

In fact, most employee communication and administration is handled by the salary advance provider, under the control of the company.

The amount the employee can access depends on how much they’ve already worked.

Typically, the employee can only access up to 50% of the wages they’ve already earned. This alleviates any risk that the employee won’t have worked the required time to repay the advance.

When payday comes around, the employee’s payslip shows the salary advance as a deduction after tax. Often the employee will be notified via a separate communication that the advance has been repaid.

“We’ve only been paying salaries monthly since the 1960s when there was a change in employment law,” says David.

“As was the case when salaries were paid weekly, salary advance lets employees smooth their wages and smooth consumption, rather than get paid in a lump sum each month.”

Salary advance benefits for employers

There are many advantages of salary advance schemes for employers.

Most relate simply to improving the quality of life of employees, which leads to clear benefits for the employer.

Recruitment

Offering salary advance is an attractive proposition that you can list in recruitment adverts, in any sector.

It remains a nascent industry not yet utilised by a majority of employers, so those prepared to embrace it now could gain a competitive advantage.

Retention and absences

Having a salary advance scheme in place can help with employee retention.

David says: “This is so important at a time when employees are moving jobs a lot. It also helps with absenteeism.”

Better workplace engagement

“We find improving your employees’ financial resilience helps with productivity as well,” continues David.

“Employees are less distracted, more engaged and happier at work.”

Salary advance benefits for employees

A recent report from the Royal Society for Arts, Manufactures and Commerce (RSA) found “almost half (47%) of young people are unable or just about managing to make ends meet each month, or have an income that varies significantly paycheck to paycheck”.

Seen in this light, salary advance schemes mean employees gain financial autonomy. They can take control and smooth their income and expenditure.

This can be transformational when it comes to employee mental health.

“Even if the employees don’t use it,” says David, “just knowing that the salary advance scheme is there and they’ve got that safety net can be good for financial as well as emotional wellbeing.”

What to consider when offering salary advances

While salary advance schemes offer benefits and simplicity for all involved, there are issues to perhaps consider.

Automating the process

Work with the provider to automate the process as much as possible.

Manual submissions and interventions aren’t going to be too much more work, but if you’re using modern time management and payroll solutions, then integrations are likely to make life significantly easier.

Data protection

Data in payroll is among the most highly protected because it personally identifies individuals. Data breaches of this type are among the most heavily penalised.

Data transfers should be as secure as possible.

You may have to adjust you existing data protection policies or even employment contracts to state that data is shared with third parties to provision salary advance schemes.

You should ensure the third-party provider you work with has protections in place and, potentially, liability insurance should a data breach occur in their service that subsequently implicates you.

Risk of reputational damage

Because of the relative simplicity of salary advance schemes, it’s more than likely transactions will proceed just fine.

David says there are rarely if ever problems, and those that arise tend to be misunderstandings (e.g. an employee believing their advance hasn’t arrived in their account but is mistaken).

But there’s no escaping the fact a lot of trust is being placed in a third-party provider.

Employees may blame the employer for any performance issues with the salary advance provider. This could be something as trivial as the salary provider app temporarily being unavailable.

The last thing an employer wants is to lose employees because of a scheme intended to increase employee retention.

Increased admin

While the task of applying for the advance and administrative issues such as providing bank details is for the employee to complete via the app or website, there are still some tasks for the employer.

Training will be required for HR and payroll staff to administer the salary advance scheme. Managers will need to know about its existence, and basic knowledge shared, such as how to access and use the salary advance app or online service.

Again, if there’s a problem with the salary advance transaction, many employees will immediately turn to their managers for help, or go to the HR or payroll teams.

All that will be required is to redirect the employee to the third-party salary advance provider’s helpline or app.

But this can still represent a drain on resources.

Furthermore, managers who pride themselves on taking personal care of employees may feel compelled to attempt to deal with the salary advance organisation directly to resolve issues. Again this can sap resources despite the best training.

How to offer salary advances

Before offering salary advances, it’s wise to solicit employee opinions on whether they want such a scheme. You may consider aligning it to measures such as pension provision as part of an overall financial wellbeing package.

There will almost certainly be a need to address misconceptions that this is a payday or payroll loan scheme, that it’s costly, or that it’s hard to use. Employees may need to be reassured that it won’t affect their credit records (because it isn’t, of course, a form of credit).

You must then find a provider.

This can be a simple matter of searching the app marketplace for your payroll and/or time and attendance system. Ensuring the provider integrates as much as possible with your existing software is vital to ensure data protection and ease of use.

It’s wise to contact the provider to ask for a demo and prepare a list of questions ahead of time, perhaps based on the aforementioned points.

Finally, you’ll need to communicate to employees that the service is available and how they can sign up to it. The salary advance provider may be able to help with pro-forma emails that you can use.

Final thoughts on salary advances

Salary advance schemes offer rewards to both employers and employees, and create a better working environment.

They represent minimal increased administrative workload above and beyond period payroll tasks, yet offer a tool that employees can use to cope with changes and challenges that are increasingly coming into focus in our modern world.

The relative newness of modern schemes that integrate seamlessly with payroll solutions means their take-up remains limited, offering businesses a simple yet effective way to get a competitive advantage in the world of recruitment and employee retention.