7 trends eroding the two-week pay cycle

December 23, 2020 10:23 AM

The two-week pay cycle, while common today, has been around only 80 years or so. Dr. Nelson Lichtenstein, a professor at UCSB, reported on NPR that job completion pay and weekly pay were the standard until the U.S. government instituted a payroll tax in 1942, which led employers to adopt the two-week standard to ease the management of paperwork and tax compliance.

“It doesn’t work anymore,” said Atif Siddiqi, founder and CEO of Branch, an earned wage access (EWA) provider that offers on-demand pay. “The traditional, every two-week payday has begun to change. The next evolution is on-demand pay which is based on when workers need it. I see on-demand pay as being the standard for paying hourly workers in the next three years.”

While there has been a general trend of paying people faster for work already performed, starting with gig workers, COVID-19 has created (or exposed) many issues that are fueling the shift toward on-demand pay, especially for hourly workers.

The precarious financial situation of many American workers is well documented — 69% are living paycheck-to-paycheck, according to a 2020 survey by the American Payroll Association. While the figure is down from 74% in 2019, it shows how many Americans still rely on getting paid on time just to meet their financial obligations.

Any variability in that pay could cause major problems.

“Hourly workers see the value of getting timely cash flow because it has real implications,” added Siddiqi. “If the timing is off you are forced to make hard decisions. We used to see rent affordability as a top concern among hourly workers. Being able to pay utilities and groceries are now the top financial concerns during this time. It shows you how stressed people are.”

A Federal Reserve 2018 report on the economic well-being of households found 41% of households would be unable to pay for an unexpected expense of $400, such as car repair or replacing a broken appliance, without undue hardship.

Stay-at-home orders, operating capacity limits and business closures — while important to reduce the risk of COVID-19 transmission — have had a dramatic effect on the livelihoods of many Americans.

According to a Branch Hourly Workers report, about three-fifths (62.3%) of hourly workers reported that their hours and work shifts have been impacted by COVID-19. Only one quarter (27.7%) stated that they were working about the same amount of hours as before the COVID-19.

“Reduced hours and shifts led to a number of employees to look for a second job to supplement their income just to pay their bills,” said Siddiqi. “It’s gotten to the point where millions of Americans are falling behind on rent and utilities because their employers have had to cut back staffing hours or even close. Take for example the entire restaurant industry.”

According to a survey by the National Restaurant Association, in the first six months of the COVID-19 pandemic, about 100,000 restaurants closed permanently or for the long-term — and nearly three million restaurant workers were unemployed. All told, the Association estimated that the industry would lose upwards of $240 billion in sales for 2020. Additionally, the survey found that among restaurants that were allowed to be open, they operated with only 71% of the normal number of restaurant staff.

Even before the pandemic hit, lower-paid workers (consumers earning less than $25,000 annually) often struggled to pay bills and bank penalty fees, as their cash flow was not in line with when their bills were due. While overdraft fees are a source of revenue for financial institutions, the burden tends to fall on a minority of people. Now with many workers experiencing irregular work shifts, their cash flow is even more strained, putting them at higher risk of exposure to bank penalty fees.

Over 78% of overdraft and non-sufficient funds (OD/NSF) fees are paid by less than 10% of checking account holders, based on data from the Consumer Financial Protection Bureau (CFPB). Almost two thirds of account holders never paid an OD/NSF fee.

The CFPB data showed that frequent overdrafters are younger (about 37 years old), have subprime credit (average FICO score of 563), use debit cards very frequently (average of 29.1 POS debit transactions per month) and have relatively low credit card ownership rates (48.9% own a credit card).

In contrast, non-overdrafters are the oldest of all bank account holders (about 46 years old), have superprime credit (average FICO score of 747), rarely use their debit cards in stores (average 4.6 POS debit transactions per month) and have high credit card ownership rates (86.6% own a credit card).

“Hourly employees have become exasperated as state shutdowns and inadequate stimulus checks mean most can’t pay their bills,” noted Siddiqi. “It’s not like most of them can work from home. Shutdowns that close restaurants or hair salons mean that these people don’t get paid. We’ve been in this pandemic for about 10 months and the March stimulus helped only for a short time, which means many have accumulated debt and are missing bill payments.”

According to a Branch Hourly Workers report, three quarters (76%) of hourly workers surveyed had missed or delayed paying a bill despite receiving a stimulus check from the government. Another 10% foresee that they will likely miss a bill payment in the future due to the pandemic.

Missed rent payments during the COVID-19 crisis have become such a large problem that the Aspen Institute estimated that roughly 30 to 40 million renters could be at risk of eviction by the end of 2020. Since the average number of annual evictions is approximately 3.6 million, the potential eviction risk would represent a 10-fold increase.

The COVID-19 crisis has moved a large group of low-paid workers (households earning less than $25,000 annually) that primarily used cash at point of sale in-stores to using their debit cards. Based on data from the PaymentsSource Future of Money Survey released November 2020, about half (47%) of low paid workers primarily used cash to make in-store purchases before the pandemic struck. This fell to just 16% when consumers were surveyed in September.

Debit cards moved from being the second-most preferred POS payment method at 38% pre-COVID to the most preferred method, at 59%, among households earning less than $25,000 annually. Other non-cash payment forms also benefited, with mobile wallets going from 5% of low income households using them as a primary payment method pre-COVID to 13% using them as a primary method during COVID. Credit cards also moved up, going from 9% to 11% choosing them as a primary payment method.

On-demand pay is a top-three benefit sought by hourly workers from their employers, and one that is realistic to enable, according to a survey by EWA provider Branch.

“Anything that employers can do to get money to their employees faster can make a big difference in their lives,” added Siddiqi. “Since it’s money that’s already been earned, the cost to the employer is minimal, yet so impactful to the employee.”

The top benefit requested in the Branch survey, by 84.5% of hourly workers, was bonus pay. The second-most popular benefit was for paid sick time off — this was virtually tied with on-demand pay (48.8% for sick time vs. 48.4% for on-demand pay). Oftentimes, hourly jobs do not qualify for paid sick leave, as these roles generally only pay for work performed. The notable exception is the Families First Coronavirus Response Act (FFCRA or Act), which requires certain employers to provide paid sick leave for someone sick or quarantining due to COVID-19, or to be paid at a two-thirds rate if caring for someone who is sick from COVID-19; or if a child’s care facility or school is closed due to COVID-19.

Earned wage access has broad appeal across all income levels according to the PaymentsSource Future of Money Survey released November 2020.

The survey found that almost one-in-five (19%) of consumers with an annual household income of $50,000 to $99,000 had used an EWA service by companies such as PayActiv, Branch, DailyPay, Immediate and others. Including both users and non-users interested in using an EWA service, the overall appeal for this group reached 63%, the highest among all income groups. Even consumers making more than $100,0000 viewed EWA services in a favorable light, with 55% stating that they had used an EWA service or would be interested in using one.

Usage of EWA services was only 7% of survey respondents for the two lowest income groups (less than $25,000 and $25,000 to $49,000 HHI) and overall interest in future use was lower than the middle income ($50,000 to $99,000) group.

“We’ve found that many employers are not only approaching us to offer earned wage access because they understand it can help their employees, but also because it can help them deal with the disappearance of cash,” said Siddiqi. “The way consumers are paying now is through an app, online, or other contactless method and no longer with cash. This means there is not enough cash for a manager to 'tip out' service workers who earn tips. By accessing electronic funds, we can use our app to help the manager tip out workers at the end of their shift. We started off in the pizza business and have now expanded that into hair salons and barbershops.”