Are You an Employer or a Bank?
by Mary Jo Spiekerman, SPHR, SHRM-SCP, Vice President Human Resources - Hausmann-Johnson Insurance
There was a time when employers paid their employees in cash. Employers prepared envelopes of money that would be handed out to employees weekly at the end of a shift. Employees went home, paid their rent and paid off their credit account at the corner grocer. If an employee still struggled to make ends meet with this weekly payment, they might ask their employer for a cash advance on their pay, which most employers provided. This was a time before credit cards and payday loan stores. The employer was often the only source of ready cash for their employees.
While many of those practices went by the wayside as technology allowed us to do direct deposit and consumer credit options expanded, there are new versions of the employer providing ready cash and financial support to employees. Depending on your company demographics, you may have employees struggling with financial insecurity. It is important that you evaluate these emerging trends to identify if they address the needs of your employees. If so, these practices may help you to attract and retain talent.
On-Demand Pay: There are a number of organizations, including large and high-profile companies such as Walmart, that are offering on-demand pay. Employees are able to request immediate transfer of payroll proceeds to their deposit accounts outside of the normal payroll schedule. This may be via their payroll software or a standalone app. The employer may establish guidelines regarding the frequency or the amount of the payment. In some instances, fees are charged to the employee for this service. Check with your legal counsel to review state laws regarding charging employees fees related to payroll before implementation.
Why might you choose On-Demand Pay? Some employers say that their employees struggle financially and their bills come due before they receive their payroll. Or, they have unplanned expenses that they can’t cover. For example, if an employee’s car breaks down and they can’t get to work until they have money for repairs, that can negatively impact productivity. Other employers whose staff is largely made up of part-time employees feel that they can incent workers to take on more shifts and work more hours if the employees can get paid more quickly.
Some employers are even moving from twice monthly or two week payroll cycles to weekly payrolls to address some of these timing issues.
Employer Loans: I recently attended a gathering of HR professionals and the conversation turned to employer loans. Several people talked about how lending money to their employees gave them a competitive advantage over other employers. They felt that it was a powerful tool to retain employees. Their employee base was made up of individuals who may have been unable to obtain credit from a financial institution, may have had bad credit, or may have been unfamiliar with financial institutions.
If you embark on lending money to your employees, be sure to review your processes, repayment practices, and promissory notes with your legal counsel to ensure you are complying with wage and hour laws and that you have recourse should your employee fail to repay you.
Student Loan Repayment: The growing amount of student debt that Americans have is receiving a great deal of coverage in the media. For many of us in HR, we are hearing our employees talk about the fact that they are deferring starting families and expenditures such as buying a home until later than they would prefer in order to pay down student loan debt.
And, it’s not just a “new graduate” phenomenon. Some people have had to drop out of school before they achieved a degree and are earning a lower wage rate than they would have had they completed the degree. These non-graduates still may have student loans to repay. Another impacted group are employees who were middle aged when the great recession hit in 2009 and after losing jobs decided to go back to school to get a degree. Many did that by taking out student loans and they are now finding it a challenge to pay off those loans while at the same time catch up on retirement plan contributions to make up for the years they were unemployed.
Assisting employees in paying off their student loans can take a number of forms. The simplest form is merely facilitating the payment. That would involve setting up a process or app that transfers a set amount of money from an employee’s payroll to the financial institution where the employee has their student loan to make their loan payment.
Another option is to make an employer contribution to the loan payment. Again, this can be done through a process or an app on a periodic basis. Some employers may utilize a formula to calculate the amount contributed. An example might be “the employer will contribute $2.00 for every hour worked up to a maximum of $4000 per year.” Or perhaps it is a flat dollar amount after a certain number of months or years worked. It’s important to structure the program to ensure that it provides a significant enough contribution, and provides it early enough in the employee’s tenure, to be a true attraction and retention tool. Please note that employer contributions to student loan payments may be taxable income to the employee. Check with your tax advisor on this.
Retirement Plan Loans / Withdrawals: Does your retirement plan offer a loan feature? If it doesn’t, should it? Not all plans do and that may impact an employee’s interest in participating in the plan. Various sources indicate that 15 – 40% of participants in retirement plans that offer loan options have taken a loan from their retirement plan at some time. Does your retirement plan offer a hardship withdrawal feature? While the definition of a hardship is governed by the IRS, and the reasons are limited, a hardship withdrawal may meet your employee’s financial needs in certain cases. Ask your retirement plan advisor for guidance on these features of your plan design.
Emergency Savings Accounts / Sidecar Savings Accounts / Crisis Funds: It is recognized that a significant percentage of Americans do not have a “rainy day fund” saved that they can tap in to. Many financial wellness programs advocate deferring a portion of each paycheck into an emergency fund of some sort. This could be as simple as an employer facilitating a direct deposit into a savings account. Or, it could be a post-tax deferral to a savings account aligned with the employers’ retirement plan. This is sometimes called a “sidecar”. A third option might be a tax advantaged employer provided assistance program called a “Crisis Fund” set up as a public charity, a donor advised fund, or a private foundation. Seek the assistance of your retirement plan advisor and tax advisor in weighing the pros and cons of these arrangements and to ensure they are set up appropriately.
Financial insecurity negatively impacts employee productivity and that hurts an employer’s bottom line. While that is an important reason to address the problem, many of us in HR continue to look for ways to provide support and assistance to our employees not only to attract and retain them, but because it is doing the right thing for them, their families, and the communities we live in.