Simple digital payroll isn't enough for the 'gig'

The trend toward contract workers, or the gig economy, presents a variety of payment challenges, challenging payroll providers to come up with innovative solutions.

The gig economy is constantly evolving with a variety of specialized and non-specialized professionals, from master’s degree-toting soccer moms to skinny- jeans-wearing college kids. The industry spans the transport industry—bolstered by ride-hailing services like Uber and Lyft—construction, architecture and design, marketing, etc.

According to the 2019 Q4 Gig Economy Index report, the gig economy is estimated to have contributed $1.4 trillion to U.S. total income in 2018. In financial software company Intuit’s 2017 Q3 earnings call, CEO Brad Smith estimated the gig economy would grow to 43% of the U.S. workforce by 2020.

There are two popular routes taken by gig workers that determine how they receive their payments: use of marketplaces/platforms to connect with companies or working directly with companies.

For those in marketplaces like Upwork, Freelancer and Fiverr, a variety of payment methods are available leveraging existing relationships of companies looking to hire freelancers.

The Gig Economy Index report pegs the most popular payment methods by marketplace gig workers as PayPal (41.9% of workers) and direct deposit. A quarter of these marketplace gig workers are paid within a week, compared with two out of every 10 non-marketplace-based gig workers who wait longer for a paycheck.

The alternative route taken by gig workers involves engaging with companies directly as independent contractors. The U.S. Bureau of Statistics estimates there were 10.6 million independent contractors and 933,000 workers provided by contract firms in 2017.

When dealing with marketplaces, companies have to provide different payment methods and pay within specific timelines as required by the marketplaces. However, this doesn't apply when contracting a lone gig worker, and the contracting company—if not instructed otherwise—would often dictate the payment terms. This can include weeks without pay for the contract worker.

Since these workers are not in the companies’ payroll they are at times classified by accounting departments as vendors and paid under policies that apply to vendors, which may include long payment periods.

The result is a $216 billion payment advance market in the gig economy, a figure representing a third of the total U.S. gig workers, who took a pay advance in 2018.

Contrary to popular opinion, the gig economy is not entirely based on workers earning small amounts to supplement their income; 40% of gig workers surveyed in the fourth quarter of 2018 for the Gig Economy Index study earned in excess of $100,000 per year. If salaried workers earning less than that can afford pay advances, why shouldn’t gig workers?

The Pay Advance market for gig workers has proved enticing enough for Mastercard to enable its push payment product Mastercard Send for pay advances for workers outside the traditional employment system. There is room for more innovation in this area, as the stats tell just a fraction of the story.

I have seen conversations rage, particularly in LinkedIn and Facebook groups, about the pain points of long payment periods, especially from larger companies. Some of the more experienced gig workers resort to only taking on clients that agree to payment on delivery. However, in a world where not all gig workers can afford to be choosy, nor all companies agree to go against internal policy and pay early, innovation in pay advance products can provide a mutually beneficial solution.

Furthermore, Europe's Payment Service Directive II (PSD2) will open up more opportunities for innovation by allowing third parties to access and manipulate customer account information from different bank accounts, by registering as Account Information Service Providers (AISPs) and/or Payment Initiation Service Providers (PISPs).