System called ‘early wage access’ gives workers part of their wages sooner, without high interest or penalties

With sky-rocketing housing costs and inflation at a 30-year high, millions of Canadians find themselves scraping by between pay periods.

After rent or mortgage payments are made, groceries and transit passes are bought and other bills triaged based on what’s due next, many of us get by on fumes — or credit — until the next payday rolls around.

The most recent survey from the Canadian Payroll Association found that 36 per cent of respondents said they live paycheque to paycheque.

But proponents of a new approach to payroll called “early wage access” say time’s up for the traditional model of getting paid once every two weeks.

“It’s an artifact of legacy technology and legacy processes,” said Seth Ross, who’s in charge of an early wage access service called Dayforce Wallet at Ceridian, a human resources and payroll software company that’s based in Toronto and Minneapolis.

“It took a lot of manpower and a lot of computing power back then to run payroll. Now we can do it continuously and in real time,” he told Cost of Living producer Jennifer Keene.

Early wage access — also known as on-demand pay — is facilitated through app-based, third-party services offered by employers. These allow workers to get some of the money they’ve already earned without the two-week delay or the  high interest rates offered by pay-day loan services.

The funds people access are not considered loans or advances because the money has been earned.

These apps have been in use in the United States and Europe since 2012 but are relatively new in Canada, said Ross, who says Dayforce Wallet has been sold to “well over” 100 Canadian employers.

Some of the other major players in on-demand pay include InstantPay, DailyPay, ZayZoon and Branch.

How it works

If your cellphone bill is due a couple of days before payday, you could access the funds to clear that bill before incurring a late fee, for instance. Or you could restock groceries when you run low instead of eating ramen for a week.

Dayforce supplies workers with a bank-card-like payment card to use to access their money and gets paid with a portion of the interchange fees that banks and credit card companies collect from businesses every time a customer uses credit or debit, said Ross, a Canadian based in Los Angeles.

Other providers charge users a flat fee of $2 or $5 for a withdrawal of some of their pay, but there’s no interest payment.

Feeling the pinch

One woman who works as an architectural designer in Toronto knows what it’s like to be painfully tight on cash between paycheques.

Although the 30-year-old earns more than $70,000 per year, by the time her rent, utility bills and groceries are covered, plus payments are made on debt she accumulated for the fees to write her licensing exams, she often has just $50 until the next pay period. Her name is being withheld due to her concerns about job security.

“Honestly, I wish I [could] find the right words to explain the daily fear, anxiety and worry that I have every day I wake up and I’m like, OK, I am so scared to open up my TD statements, my bank account statement because I just don’t want to have a reminder,” she told CBC Radio.

Despite those challenges, she said she’d want to learn more about managing her finances before using an early wage access service in order to assure herself it didn’t get her in more financial trouble.

Marvin Ryder, an associate professor of marketing and entrepreneurship at the DeGroote School of Business at McMaster University in Hamilton, said he can see this kind of system working as a perk organizations offer to staff.

“But then you turn that around, will you remember that when it does come time to get paid and you’re expecting the $1,000 from your employer, ‘oh, I’ve already withdrawn $400, so all I’m getting is $600?'”

Built-in brake system

But most of these early wage access services have a modest limit — $200, for example — on how much people can get their hands on before payday. ZayZoon cuts users off after they’ve accessed half their pay cheque.

Adeola Omole, a Calgary lawyer-turned-wealth-coach who is working on her second book about personal finance, said she sees a role for early wage access.

“People who are living paycheque to paycheque can utilize this type of program to at least prevent themselves from going to a payday loan and getting charged what I think is predatory fees, and it also allows someone to tap into money they’ve already earned.”

Ryder said the way we do payroll today has roots that reach back to the start of the First World War, prior to which three-quarters of Canadians worked in agriculture and were paid in cash at the end of each day.

“We needed a source of revenue to help fight the First World War,” he said, and that was the start of income tax, with employers collecting and remitting on workers’ behalf.

“But by the time you have to do the paperwork and the bureaucracy around that, it started to make more sense to accumulate pay over several days.”

Initially pay was done weekly, said Ryder. Then as programs like employment insurance and the Canada Pension Plan came to be, bringing with them more payroll deductions, the two-week pay cycle was introduced.

Apart from the advent of direct deposit in the 1980s, there hasn’t been much innovation in payroll, he said.

“It’s not that the technology wouldn’t enable it. It just requires a different thinking around the cash flows of the business.”

Ross says payroll is “one of the last places where we wait two weeks for anything.”

“You can stream anything you want to watch, any song you want to listen to, instantly. You can get anything delivered from Amazon, you know, now the same day. Why am I waiting two weeks to get paid for the hours I’ve worked?”