Why small-business owners should pay employees on the same day

Ask a roomful of small-business owners their thoughts on paying employees on the same day that they work — instead of waiting until the end of a pay period — and you’re likely to receive a few raised eyebrows.

That’s because this is not how workers are paid, right? They get paid every one or two weeks, right? But traditional payroll is changing. Now, many employers are offering workers — particularly hourly employees — a portion of their wages on the day they work.

“The bi-weekly pay cycle is a relic of a technologically limited era, when employers had to rely on outdated technology and batch processing that forced them to implement these fixed cycles,” said Seth Ross, the general manager of Dayforce Wallet, a same-day pay service offered by human resource firm Ceridian. “With modern advances in technology, people today can access anything they desire on-demand, from streaming entertainment to deliveries of their favorite foods. In this context, waiting for a biweekly payday feels archaic.”

» READ MORE: Time to consider an unlimited paid time off plan for your business

A 2019 survey of 1,180 American adults conducted by the Workforce Institute of human resource firm Kronos found that 61% of employees in the health-care, retail, manufacturing and construction industries preferred immediate access to their wages, with more than half saying that offering such a benefit would be more attractive than paid time off.

This is an attractive benefit to offer. But how does it work?

A business typically pays its employees a percentage of their hourly earnings for the day (generally anywhere from 30% to 50%) with the balance due at the end of their typical pay period. Usually, an outside service that integrates with an existing payroll system — such as Dayforce Wallet, DailyPay or PayActiv — is used to help accommodate payment through direct deposit or debit card as well as account for taxes and other withholding.

“The process is quite simple,” said Ted Millstein, an executive with health-care provider Patriot Home Care, which began implementing a daily pay benefit using DailyPay this month to its more than 3,500 employees in the Philadelphia area. “An algorithm is used to calculate taxes and other deductions and the net pay is available the day after the shift is completed. The employee can choose to have the funds transferred to them at any time thereafter. Any funds not transferred to the employee through DailyPay is paid on their regular pay day.”

» READ MORE: A little known provision of the CARES Act helps employees pay their student loans

According to a pre-pandemic report from the nonprofit financial services advocate Financial Health Network, more than 43 million Americans struggle with finances, with many needing loans from costly payday lenders to make ends meet.

A 2021 study from accounting firm PwC also revealed that 42% of full-time workers in the U.S. said they find it hard to meet household expenses on time each month. Clearly, implementing an on demand payroll benefit can help alleviate those burdens, which makes employees both more productive and less stressed.

It also helps with employee retention. Ceridian conducted a study last year and found that employees who used their on-demand pay solution showed 42% lower voluntary turnover than non-users. “We also saw that companies that offered the service had a 5% higher close rate on open positions and a 9% faster time to close for open roles,” Ross said. “Those are meaningful impacts to any company’s bottom line.”

Funding payroll every day can create cash flow challenges for some employers. Small businesses may find it difficult interweaving the demands of a daily pay commitment with invoices outstanding from customers and payments due to suppliers.

Others — particularly older business owners — may be resistant to changing systems they’ve built over a long period of time. But short-term financing is available for those who need it, and for the employers who can overcome these challenges, there is another tremendous advantage: offering an attractive benefit that can help entice good workers, particularly in these times of tight labor supply.

“We are beginning an ad campaign (TV, radio and social media) to let prospective employees know that we offer DailyPay,” said Millstein of Patriot Home Care. “Our expectation is that our employees will embrace DailyPay and it will have a positive impact on our recruiting efforts, as well as providing our workers with more financial flexibility and security.”

So to eye-rolling business owners, I say this: Consider a same-day pay system. If you can overcome some of the challenges it could be an effective way to retain — and recruit — great employees.

Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.