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Darren Wingfield

Darren Wingfield

Commercial Manager

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An Intro to Small Business Salary Advance Schemes

Posted on 16/11/22  |  3 Minutes

Employees are one of the most valuable assets in business, and attracting the right talent for your organisation can be tough with stiff competition in the marketplace.

However, there are a number of benefits you can offer employees to improve staff retention and engagement, and make your business a worthy contender in your industry.

One of these is a salary advance scheme, which allows an employee to access a portion of their salary in advance.

As employee perks go, this can be a game-changer - but before you offer it to your employees, it’s essential to understand exactly what it is, along with the pros and cons for you and your staff.

What is a salary advance scheme?

In its simplest form, a salary advance scheme is where an employer gives an employee access to the wages they’ve already earned before the end of the usual payroll period.

Sometimes referred to as ‘on-demand payroll’ or ‘earned wage access’, a salary advance scheme offers employees a level of flexibility with payroll credit. This affords them the option to take an advance on some of their wages when they have a cash shortfall - for instance, during a month with unexpected payments, like plumbing emergencies.

For employers, this salary advance can be paid directly from the business payroll balance, or through third-party providers (often called ‘earning on-demand providers’).

On the face of it, these schemes can appear to work like payday or payroll loans - but they differ greatly in a number of ways. Here’s why:

  • Unlike personal payday loans, the employee can only take an advance on the wages they’ve earned to date - not a specified amount
  • The advance repayment amount is automatically deducted from the employee’s wages the following month, which is non-negotiable
  • The outstanding amount is always paid within a month or less of being issued, assuming payroll is processed monthly
  • Salary advances don’t usually have interest applied to employees or employers

In a traditional sense, this means that salary advance schemes aren’t classified as giving employees credit, as the employee won’t undergo affordability testing or credit checks.

This doesn’t mean employees can simply take advances whenever they choose, though.

Employers can and should monitor scheme usage to ensure employees aren't facing wider financial or debt issues. In these instances, they may need to intervene and refer the individual to an appropriate debt management scheme.

From an employer perspective, those who choose a third-party provider will be expected to pay either a small set transaction fee or a small percentage of the advanced amount. This can be charged to the employee or absorbed by the business owner.

In addition, employers will be subject to a credit check by the provider to establish whether the company (not the employee) is able to repay their debts before the loan period expires.

How does a salary advance scheme work?

When it comes to implementing a salary advance scheme, it can be a fairly straightforward process to set up and manage on a monthly basis.

The most important element of these schemes is to have an accurate and up-to-date record of how much employees have earned at any given point in the month. This can easily be set up and automated with time and attendance software, as well as payroll software.

This software is then shared and integrated with third-party providers who can then automatically calculate the correct salary advance amount as and when required each month. Alternatively, this process can be calculated manually, with employers exporting over the correct payroll and attendance data as required.

It’s at the employer’s discretion whether they offer the scheme by default to all employees or on an opt-in basis.

From an employee perspective, most of the interaction is done with the third-party provider by signing up via an online platform.

Employees are only allowed to take an advance on wages they’ve earned and, typically, this is capped at 50% of the salary earned to date to ensure an employee will have worked enough time to pay it back.

The salary advance will show on their payslip as a deduction after tax, and they will be notified once the amount has been repaid.

The pros and cons of salary advances

Before you look to introduce this scheme to your small business, it’s important to understand the benefits and drawbacks of the scheme for you and your staff.

Employer pros

For employers, many of the benefits are around improving employee quality of life, which comes with various perks:

  • Better staff retention and absence rates: the flexibility salary advances bring to employees can serve as a powerful motivation for them to stay in their job and reduce their absence rate
  • More effective recruitment: listing salary advances as one of your employee benefits while recruiting can be an effective way to attract new candidates
  • Improved employee engagement: the option to alleviate financial concerns and stress can make employees more engaged and productive at work

Employer cons

It’s also important to be aware of the following drawbacks when it comes to salary advance schemes:

  • Increased payroll admin: whether you use a third-party provider or manage the scheme in-house, it can mean more payroll admin to ensure financials are managed correctly
  • Potential data breaches: sharing data with third parties always brings some risk, so it’s imperative to transfer data through secure channels to avoid data protection issues
  • Reputational damage: schemes that use third-party providers give you little control over the processing and speed of advance payments. However, employees will likely see the employer as responsible for this element, which can lead to complaints and frustration if the service provider doesn’t function properly

Employee pros

When it comes to employees, the perks of salary advances include:

  • Financial control: with access to wages in advance, employees can find it easier to manage their finances more effectively
  • More flexibility: unforeseen costs when employees don’t have the cash can be worrying, but salary advances can help them to bridge the financial gap until the end of the month
  • Improved mental health: with more control, the worry and stress around financial concerns can be reduced, boosting employees’ mental health

The cons:

  • Reliance: living hand to mouth, some employees can become reliant on a wage advance - which contributes to a cycle of lending
  • Increased debt: the above can also lead to increased debt, as employees aren’t able to catch up to get back on an even keel when the following month’s paycheck isn’t enough to cover a full month’s living costs

Introducing a salary advance scheme offers benefits for employers and employees, helping to create a more flexible workplace that gives employees the opportunity to manage their own finances.

However, you need to understand the benefits and drawbacks to make an informed decision, as this may not be the right approach for every business.

If you’d like some professional advice on salary advance schemes to see if they’re right for you, why not get in touch with the Harlands team? We’ll happily take you through the process, making sure we find the right solution to help your business grow.