What is Earned Wage Access?

Earned Wage Access (EWA) is an alternative way to get paid before your regular payday. Instead of waiting for the usual two-week pay cycle, you can access a portion of your earnings earlier. It makes sense: if you worked today, why not get paid today?

More companies are starting to offer EWA to their employees, but it’s not without controversy.

If your employer offers EWA, you might be wondering if you should use it. Or, if you own a business, you might be considering offering it to your employees. Let’s look at the pros and cons of EWA to help you decide if it’s the right choice for you or your employees.

Understanding earned wage access

What is earned wage access? Also known as on-demand pay, early pay access, or instant pay, it is a financial benefit that allows employees to access their earnings before their scheduled payday. Instead of waiting for their weekly or bi-weekly paycheque, employees can request a portion of their earned money at any time and receive the remainder on their regular payday.

This allows employees to get their pay when they need it, so they can pay their bills on time or have a financial cushion in case of emergencies.

For a small fee, you can get your earned money within a day or two, or even instantly, if you’re willing to pay an extra fee. Then, the amount you withdraw early is subtracted from your next paycheque. This system is especially popular with people who work hourly or part-time jobs.

Let’s look at an example. If you work 20 hours a week part-time at $20 an hour, you would normally get a paycheque of $400 (ignoring taxes and other deductions for simplicity).

Now, let’s say it’s the 10th of the month, and you’ve already worked 30 hours. Today, your car won’t start, and you need to purchase a new car battery, but you won’t get paid until the 15th.

With an EWA service, you can get paid for some of the 30 hours you’ve already worked. For example, you might take out $150 through EWA. When you get your paycheque on the 15th, the $150 and a small fee (usually $2 to $5) will have been deducted. Some employers might even cover the fee for their employees.

Earned wage access programs have been a popular business practice in the U.S. for a while and even mandated in parts of Europe. More recently, these programs have become available and are included in employee benefits packages here in Canada.

When used effectively, this established business practice can help Canadian employees achieve greater financial security.

How does earned wage access work?

Earned wage access is available to anyone in Canada as long as your employer partners with a service provider. Early access to pay can be very helpful for companies with many part-time, lower-wage employees by helping to improve employee financial health. These companies can work with Fintech companies that offer EWA services.

Here’s how it works

1. Get the EWA app that works with your employer and connect a bank account or debit card where the money will be deposited. The app is usually linked to your employer’s payroll system and shows how much of your paycheque you’ve earned by the end of each payday.

2. Request instant payment. The app usually limits how much you can request each day or pay period, often up to half of your earned wages. Your employer might have additional restrictions.

3. Agree to the fees. If you agree, the money is deposited into your account usually within one or two business days or instantly if you pay a higher fee. Keep in mind that fees might be taken out before you receive the money or with repayment.

4. Get paid the rest of the money you’ve earned on payday. Any money you receive in advance will be deducted from your paycheque.

Earned wage access is only possible if your employer partners with an EWA service provider, as only your employer can verify your earned wages. If you want this option, look for companies that offer it when applying for work.

However, watch out for earned wage access providers that circumvent working with the employer, as they may be providing something legally different. Essentially, if you get paid without verification of an earned wage from your employer, it could be considered an advance or loan, which has other financial and legal obligations.

How do you receive the money?

There are several types of earned wage access programs that can be provided to consumers in multiple ways. All legitimate EWA programs are offered through your employer as a benefit, similar to health insurance or a retirement plan. Some large employers might choose to provide earned wage access directly to their employees, while most employers partner with an EWA provider.

These providers offer several methods for accessing wages. The most common method is through a debit card linked to an account with the earned wage access company. You request an early withdrawal via an app, and the money is deposited into your account. You can then use the card to make purchases online or in person. Some companies also offer options for direct deposit into your bank account or holding the money in a digital wallet.

Why is earned wage access becoming increasingly popular?

It offers a more flexible payment system. Earned wage access or on-demand pay lets workers access their earned money before payday. So, if payday is Friday, workers can get part of their money on Thursday, Wednesday, or even Monday if they’ve already earned it earlier in the week.

It benefits employees

Earned wage access systems are popular because they allow workers to access their money almost immediately. Instead of waiting until payday, workers can pay bills or buy groceries as soon as they’ve earned the money. This is helpful for budgeting because it ensures they have cash for daily or weekly needs.

Employers also benefit from this flexible payment system. Companies that let workers access their wages before payday help create a healthier workforce. Keeping workers out of debt is crucial for long-term business success. By ensuring employees get their money as soon as they’ve earned it, companies can prevent them from falling into debt.

It benefits companies

Modern companies should always look for new ways to improve. Earned wage access helps them update their payroll system without losing productivity. In fact, productivity might go up because workers are more motivated when they feel fairly paid.

Employees with access to flexible payment systems tend to stay with a company longer. Many businesses spend a lot of money hiring and training new workers who often leave quickly. With earned wage access, workers feel valued and stay longer, developing new skills and becoming more productive.

Companies that care about their employees’ long-term financial well-being also benefit from earned wage access. Workers with instant access to their earned money have more freedom to save and invest.

For example, they might start saving for retirement earlier because they have more immediate funds. This leads to financial security and a happier retirement. As such, businesses that offer on-demand pay can attract more top talent.

Pros of earned wage access

Those in favour of on-demand pay point out numerous benefits for earned wage access. Let’s explore the most prominent ones.

1. Alternative to high-interest loans

Payday loans are problematic, primarily because of their extremely high interest rates. The Canadian government estimates the effective interest rate on payday loans ranges from 500 to 600%.

These rates trap borrowers in a cycle of debt, requiring them to take out a new loan to pay off the high interest rate on the last one.

Both earned wage access and payday loans put cash in the employee’s pocket, then deduct it from their paycheque. The key difference is that EWA does not charge interest because it is not a loan, making it a financially smarter and healthier alternative.

2. Your pay on your terms

With earned wage access, employees get the major benefit of being able to cash out funds when they need them. Talk about flexibility. By allowing early access to earned wages before payday, employees can handle unexpected expenses without turning to high-interest loans or incurring overdraft fees.

3. Great for new employees

The ability of employees to access their funds when they need them is particularly important for new employees. With earned wage access, they wouldn’t have to wait until the end of the pay cycle to get their first paycheque. This is particularly important for people who have not had a job in a while.

4. High transparency

Because of their immediate nature, earned wage access programs are updated every single day, if not more often. This is necessary for employees to be able to withdraw funds based on their hours worked.

At the same time, it lets employees easily see how much money they have available. It gives them more confidence and transparency in their funds.

5. Benefits for employers

Employers can use earned wage access as a selling point during recruitment. This can help them attract better talent. It can also improve employee retention, reducing costs for replacing and training new ones.

Cons of earned wage access

While those who support EWA say that it offers a better alternative to payday loans, some critics say that it is not much better. Although we don’t agree and have written about which EWA misconceptions to avoid, here’s what the critics have to say:

1. Employees can get trapped in a cycle

Even without the high interest rates, critics argue that it is easy for employees to fall into a cycle where they rely on the advance from EWA, just like with cash advance apps.

They also argue that early access to one’s paycheque could ruin their budget for the following pay period. They will have less than expected in that pay period and, therefore, need to access some pay early once again.

2. It could make budgeting harder

Critics also argue that EWA makes it harder for users to budget. This comes down to the fact that any funds accessed early get deducted from the paycheque on payday. As a result, critics believe the paycheque will be lower, and it may be harder to pay future bills.

At the very least, someone who takes advantage of EWA will receive a slightly different amount every payday, which can make budgeting and financial planning challenging.

3. There are still fees

As mentioned, some EWA programs do not charge interest — the keyword being “some.” Some do charge interest, while others may charge other fees.

The US EWA provider Earnin, for example, has faced criticism for its tipping model. Although it has since changed, at one point, Earnin limited the size of loans based on the tips users had paid.

Some estimates indicate that the fees from some providers can create an effective interest rate of 365% or more.

4. The ability to advance more than the paycheque

There have also been cases where people used their earned wage access program to receive more money than they would earn on their following paycheque, effectively forcing them into overdraft.

This also poses a risk for the EWA provider. They could potentially advance someone more than they will be able to pay back.

Of course, the risk of either of these scenarios happening is low. That is because the EWA system only advances funds for hours that were already worked. The programs will not offer advances based on planned hours.

5. Employers have upfront costs

Employers may also have to pay to start using an EWA program, spend time and money rearranging payroll, and possibly find a new solution that is compatible with their chosen program.

That said, employers can also pass most of the program's costs onto the employees who take advantage of it. Of course, that only worsens the earlier concern about fees.

Final thoughts

Some employers in Canada offer earned wage access via a third party or partnership. This lets you get an advance on your paycheque based on hours that you have already worked. Essentially, you can get access to wages that you have already earned but are still part of the current pay cycle.

EWA gives you much more flexibility in terms of your finances and can provide a financial safety net. At the same time, you have to be cautious about any potential fees and changes to your budgeting. As long as you use a reputable platform and are aware of any fees, EWA can be incredibly useful.