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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:
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.
For employers, many of the benefits are around improving employee quality of life, which comes with various perks:
It’s also important to be aware of the following drawbacks when it comes to salary advance schemes:
When it comes to employees, the perks of salary advances include:
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.