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On-demand pay: what is it and should you use it?

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With the cost of living soaring and high interest rates making debt more expensive, having flexibility when it comes to your pay day can be an attractive concept.

Traditionally, employees get paid on a bi-weekly pay period, or in some cases, monthly. However, on-demand pay is a system that gives employees early access to a portion of their paycheque between paydays.

Although it’s an enticing option, it’s important to consider some of the risks, potential fees, and understand what long-term reliance on the service might signal about your overall financial health.

What is on-demand pay?

On demand pay, also known as earned wage access, is a service linked to an employer’s payroll service that lets employees access a portion of their paycheque before their pay schedules. With financial stress weighing on many Canadians, on-demand pay has become increasingly popular among employees in recent years.

It simply lets employees access cash flow to cover any unexpected expenses that arise between pay periods.

Employers offering on-demand pay in Canada

According to The Globe and Mail, 930 employers worldwide offer Dayforce Wallet, and about 50% of employees, on average, sign up to use the service.

There are many different payroll services that offer on-demand pay, including:

  • Dayforce Wallet by Ceridian
  • Instant Financial
  • Cashout by Gusto
  • Paychex
  • Paylocity

Some of the companies registered for earned wage access include Walmart, Taco Bell, Amazon, McDonalds, Longo’s, and OTG Management, among others.

Some employers have even started to offer on-demand pay as a hiring incentive, as it helps them attract and retain new talent, especially hourly workers.

How do I use on-demand pay?

If you work for an employer that’s registered for the service, you should be eligible to sign up. There are no seniority requirements, so most employers will let you sign up as soon as you start working.

If your company offers earned wage access, you can follow these steps to get started:

Download the payroll app

Each early wage access payroll system has a mobile app that employees can download to request money before their scheduled payday. This will be the app associated with the payroll system your employer uses. Then, after making an any early withdrawal, employees can view how much is left in their upcoming paycheque on the app’s interface.

Link your bank account

Link your bank account to the app so payroll services can make a direct deposit into your account. Some providers will also provide a debit card loaded with your funds.

Request part of your paycheque

On the app, you can request part of your next paycheque. Although the amount that you can access early varies between providers, most companies generally cap it at around 40%-50% of your next paycheque, or about $500, whichever comes first.

Pay any additional fees

Similar to an ATM, there’s a fee associated with each on-demand transaction made. Whether the employer or the employee pays this fee depends on which earned wage access company your employer is associated with. If you’re required to pay the fee, be mindful that this can add up over time, and you could be losing a significant amount of your paycheque to on-demand fees in the long term.

Get your paycheque

When payday comes around, you’ll receive the remainder of your paycheque, which will be your regular pay minus any funds you withdrew beforehand.

Another thing to note is that most on-demand services won’t tax your on-demand withdrawal. Rather, your employer will deduct the taxes from your next paycheque, which could make it even lower than expected.

Should you use on-demand pay?

While early access to income may be helpful for a one-time emergency, it has the potential to become a crutch. If you consistently access your paycheque early to make ends meet, it could leave you chronically behind on your monthly bills.

“There are cases where it can be valuable and help legitimately solve real challenges that people face,” says David O’Leary, chartered financial analyst and WealthRocket’s personal finance expert.

“The first thing is to figure out whether you’re simply not earning enough to meet your core cost of living,” he says, “or whether you’re spending more because you don’t have a budget and maybe lack some financial discipline.”

Since the amount you withdraw will lower your upcoming paycheque, it’s easy to get stuck in a recurring cycle of withdrawals. On average, U.S. and Canadian employees registered for on-demand pay with Ceridian make six requests per month of about $115 each, according to The Globe and Mail.

In some cases, using early wage access to increase cash flow may signal problems with budgeting. O’Leary says that the need for it, which is generally targeted to hourly employees, signals a larger systemic issue — namely that some companies aren’t paying their employees enough relative to inflation.

“There are a lot of parallels between on-demand pay and payday loans,” says O’Leary. “The vast majority of people who utilize payday loans aren’t using them in a healthy manner where they’re paying it back. They’re making up for a deficiency in their living wages.”

O’Leary recommends creating a budget for how you’re going to cover your bills so you don’t become reliant on the service. This could involve downloading a budgeting app or making a spreadsheet to help you monitor your spending and help create a sustainable financial plan.

“It’s too easy to get behind and spend the extra money that you can access as soon as you want,” he says. “I’d be very careful about it.”

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