What financial wellbeing support should be offered around salary advance schemes?

salary advance schemes support
  • It is important that salary advance schemes are explained properly so that staff fully understand how these operate and the costs involved.
  • Many scheme providers will include financial education and guidance on how best to benefit from the scheme.
  • Having access to data and monitoring usage each month can help identify if employees are repeatedly drawing down on their wages in increasing increments.

With financial wellbeing on many employers’ agendas due to the rising cost-of-living, many have been reviewing their pay and financial wellbeing strategies. One initiative that is seeing a surge in popularity is the salary advance scheme, also known as earned wage access.

The scheme enables staff to draw an advance on their salary, usually during the first three quarters of a pay cycle. Due to its potentially risky nature, employers should consider offering financial support and education around it to ensure employees are fully aware of all it entails.

Scheme usage

Salary advance schemes are often used for emergencies, while those with variable income such as shift workers may use it to tide them over until their next payday.

The scheme is increasingly used by a wide range of demographics, including those in the healthcare, retail and hospitality sectors, but now IT and utilities employees are also taking part, says Jonathan David, founder and chief executive officer of FlexEarn. “Usage has risen drastically over the past year as a result of the staff shortage crisis, with many employers looking for cost-effective ways to attract and retain a limited pool of talent,” he says.

Looking at on-demand pay services usage last year for example, while the average frequency of withdrawals rose from 2.2 to 5.6, the average amount withdrawn fell from £97 to £66, says Paul Bartlett, chief executive officer of CloudPay.

“This suggests that employees are increasingly drawing down part of their wages early on to help get through day-to-day expenses, rather than in response to one-off issues,” he says. “For employers, this does highlight that benefits of this kind will become an increasingly valuable attraction and retention tool.”

Usage education

It is important that salary advance schemes are explained properly through financial education so that staff understand their true cost. For example, withdrawing a portion of their salary early means there will be a deduction from their pay cheque.

To avoid getting into a cycle of debt, employees would benefit from understanding how to better manage their finances, explains Jonathan Watts-Lay, director at Wealth at Work.

“These types of schemes normally come with a charge, so while they can be helpful as a one-off, they are not such a good idea if they become the norm to pay for usual weekly or monthly expenditure,” he says. “In the current environment, financial education and guidance on topics such as how to budget, tips for saving money and debt management, as well as explaining how the workplace benefits available can help, are particularly useful in helping employees build their financial resilience.”

Employers should also be aware of the importance of language: cautions about overuse or that the scheme is for emergencies only, for example, could result in fewer employees asking for help.

Such schemes also have the potential to prevent staff from getting into debt in order to make ends meet; a clear channel of communication connected to the benefit that directs staff to financial guidance should be considered, adds Bartlett.

When implemented properly as part of a holistic strategy, it can be a beneficial tool, says Emily Trant, head of impact and inclusion at Wagestream. “There will always be outliers who might need further support, so employers should have a clear route to signpost their employee assistance programme,” she says.

Many scheme providers will include a range of financial education tools and guidance on how best to benefit from the scheme, however, there are ways employers can approach the subject that make employees more comfortable, such as listening and signposting, says David.

“There is a swathe of free resources out there, including StepChange and Money Helper. Energy firms have their own resources and funds to help people in financial difficulties. Train managers to know the basics, create financial education resources or work with a partner to offer online resources, such as guides and tools around topical subjects such as inflation, energy prices and more.”

Pay data

Equipping payroll teams with insights can help to provide better financial wellbeing support. Having access to data and monitoring usage each month can identify if employees are repeatedly drawing down on their wages in increasing increments, for example. This helps to facilitate conversations so that employers can give appropriate support.

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“There are ways to provide some control that can limit any negative impact on employee finances,” says Bartlett. “The employer can set rules that limit withdrawal values employees can make. This could include setting a percentage limit on the earned salary, specifying minimum and maximum single withdrawal values for groups or individuals, or limiting the number of withdrawals per pay cycle.”

While a salary advance scheme can offer employees financial flexibility, employers should ensure the scheme is fully communicated before anyone signs up, and offer support and education to avoid any pitfalls.