Most people know the sinking feeling that comes with an unexpected cost arriving days before payday. Even consistently employed people run into the problem of cash flow from car repairs, medical bills, utility payments, emergency travel, etc. To solve this problem, some employers will provide a payroll advance.
An employee payroll advance happens when an employer gives an employee a portion of the employee’s future pay early, and the employee repays the advance by the employer withholding future pay.
Payroll advances are primarily employer-provided benefits and are not like payday loans or other short-term lending options because payroll advances are typically easy to get, and do not involve credit checks or high interest rates. This guide will introduce you to payroll advances (what they are, how they function, who is eligible, their pros and cons) and present some other options for employees to get access to cash before they receive their payroll.
What is a Payroll Advance?
A payroll advance (often referred to as a paycheck advance) is a benefit employers extend to employees when the employers provide employees with pay before the employees’ scheduled payday. Unlike traditional loans that employees obtain from banks, credit unions, or other lending resources, payroll advances are employer-provided.
Payroll advance characteristics include:
– Direct employer funding
– Employee already earned a part of the wages in advanced
– Payroll deductions for repayment
– Short-term arrangement
– Credit checks generally not required
These features often lead people to believe payroll advance and payday loans are the same. Unlike payroll advances, payday loans are provided by a third-party lender and can feature exorbitantly high APR and fees. Payroll benefits, on the other hand, are considered an employee benefit and in most cases a workplace accommodation.
Payroll advance interest is not charged by many companies, but policies across different companies and jurisdictions can be completely different.
How Does a Payroll Advance Work?
The process of advancing payroll differs from company to company; however, the majority of organizations will have a standardized process to capture the advance and ensure the repayment.
Employee Request
The process begins when an employee approaches the HR department, payroll team, or their manager to request an advance. The employee generally states the dollar amount of the advance and the reason they are requesting it. This is especially true when an organization’s policy dictates that the employee must document the financial hardship or the emergency.
Employer Review
The employer will examine the request based on their internal guidelines. This may include the employee’s current payroll status, their length of service, previous requests for an advance, their ability to repay the advance, and any other factors that are defined in the organization’s payroll advance policy.
Approval and Documentation
When the employer approves the request, the employee must sign a payroll advance agreement. This agreement will include:
- The amount being advance
- Schedule for repayment
- The amount to be deducted from payroll for each scheduled repayment
- Dates of repayment
- Employee authorization for deductions
Written documentation ensures each party is made aware of their obligations and serves as a compliance aid for the payroll department.
Funds Are Disbursed
The employer will disburse the advanced funds once the request has been approved. Depending on the organization’s payroll system, the advance may be issued via direct deposit, a paper check, or other payment methods.
Repayment Through Payroll Deductions
Payroll advances are repaid through deductions from future payroll. Some employers will repay the advance in full through the next scheduled payroll, while others will repay the advance over multiple pay periods to lessen the financial burden on the employee.
Payroll Advance vs. Paycheck Loan vs. Earned Wage Access
Many will use these terms interchangeably, however, they refer to different financial products.
| Feature | Payroll Advance | Paycheck Loan | Earned Wage Access |
| Source of Funds | Employer | Third-party lender | Wages already earned |
| Credit Check | Usually no | Often yes | Usually no |
| Interest Charges | Usually none | Often charged | Fees may apply |
| Repayment Method | Payroll deductions | Loan payments | Deducted on payday |
| Based on Earned Wages | Sometimes | No | No |
Payroll advances are seen as safer than paycheck loans since there are no high-interest rates involved. Earned Wage Access (EWA) allows workers to take out money that has already been earned, rather than money that has not yet been earned.
Who Is Eligible for a Payroll Advance?
Unlike paycheck loans, eligibility for a payroll advance is determined by the employer. Each company has policies on eligibility, how/if requests are approved, and any limits.
Some common eligibility guidelines are:
- Staying employed for 60 to 90 days
- Being employed full-time (or part-time status that qualifies)
- Having a good relationship with the company
- Not having open disciplinary issues
- Having a financial need or an emergency
- Following the guidelines for a previous payroll advance
Companies also tend to limit how many advances can be requested. An employee may be allowed to request one or two payroll advances in a year, or a payroll advance may be limited to a certain dollar amount based on the employee’s earnings.
Employers are not obliged to give payroll advances, and if they decide to give them, it is based on the company’s policies, the unions’ agreements, what is typical for the industry and the local and state laws.
If employees want to know if payroll advances are permitted in their company, they can consult the employee manual or inquire with HR.
Pros and Cons of Payroll Advances
Pros
No Interest in Most Cases
Most payroll advances also do not charge interest, so they are a good solution when borrowing is needed.
No Credit Check Needed
Employees can usually bypass the credit check process because employment and company policy tend to provide most of the details for approval. For this reason, the request for an advance usually does not result in a change in credit score.
Quick Cash
Advances provide a speed advantage in getting cash, for employees, compared to a traditional loan option.
Less Risk than a Payday Loan
An advance provides an alternative to a payday loan, short-term debt, or a loan with high fees.
Good for the Employee
Implementing payroll advances can create a more satisfied workforce, can contribute to a positive work environment, and aid in employee retention for the employer.
Disadvantages
Smaller Future Paychecks
An advance results in a deduction from an employee’s take home pay, and this can result in more budgeting problems.
Financial Distress
While a financial advance can help in a particular financial distress situation, it can lead to more financial distress if the advance is used repeatedly on a regular basis.
Administrative Burden
There is an extra workload for the employer in tracking requests and deals, setting the advance deductions, and remaining compliant with the laws concerning payroll and wages.
Not Universally Available
Many companies do not advance payroll, so employees do not have a choice if immediate cash is needed.
Alternatives to a Payroll Advance
While there are financial options available, they may not all be extremely favorable or accessible, depending on the financial distress situation.
EWA Apps
DailyPay, Payactiv, and Even are services that allow employees to access part of their earned wages before their scheduled pay day. More employers are choosing to use this service.
Employee Assistance Programs (EAPs)
Some Employee Assistance Programs provide aid with access to emergency financial assistance, grants, low-cost loans, or financial counseling.
Credit Union Personal Loans
Compared to other lenders, credit unions typically have personal loans that have lower interest rates and cheaper repayment terms.
401(k) Loans or Hardship Withdrawals
With some retirement plans, loans and hardship withdrawals are possible, but the savings for retirement will be impacted long-term, and there may be tax implications.
Community Assistance Programs
Emergency help with housing, utilities, food, and medical expenses may be available through local government organizations, charities, and non-profit and faith-based organizations.
Buy Now Pay Later Programs
Buy Now Pay Later services allow consumers the ability to make specific purchases and then pay for them in multiple installments. These services do not offer uses for general-purpose cash.
Conclusion
If an employee faces an unexpected financial emergency that will last until the next scheduled payday, a payroll advance may be a suitable option. Since a payroll advance is repaid through a paycheck, it is lower cost and less risky than payday loans and other forms of expensive short-term financing.
Payroll advances typically have no credit check and do not impact credit scores, which is an important benefit. It is also important for employees to know that future take-home pay is decreased.
