At the recent APA Congress, we discovered why so many payroll professionals are downright afraid of the daily pay benefit. Many people we met there thought the daily pay benefit was something it isn’t—and we heard plenty of misconceptions about what they thought it was.
We understand that there’s a lot of confusion, so we spent a lot of time setting the record straight about what the daily pay benefit actually is, both at our booth and in our sessions. These are some of the questions that repeatedly came up:
- Who funds the early wage payment (the employer or DailyPay)?
- Doesn’t this constitute constructive receipt?
- How do you handle garnishments and deductions in arrears?
- What are the key differences in pay stub reporting?
To answer these questions, it helps to understand the three different daily pay benefit models and how they are unique in terms of who does the funding and how the funder is repaid. Please note that this is based on our understanding of the various models and you should do your own research to confirm these points:
- In the deductions model, the vendor funds the payroll advance to the employee and the employer repays the vendor on payday via a paycheck deduction.
- In the company-funded model, the employer funds the payroll advance and pays out only the remaining amount (after any advances) to the employee on payday.
- In the DailyPay model, DailyPay funds the payroll advance and is repaid through the normal payroll process via the employee’s DailyPay account.
Doesn’t a Daily Pay Benefit Constitute Constructive Receipt?
Under the rule of constructive receipt, wages are taxable when they are made available to employees. The easy answer to this question is, “It depends on the model.”
- Company-Funded Model
In the company-funded model, the employer is funding the advance, so this could be construed as constructive receipt. In that case, taxes would need to be paid on the same day as the advance is made available to the employee.
- DailyPay Model
Under the DailyPay model, because DailyPay (not the employer) funds the advance, taxes don’t need to be remitted until the employee’s regular payroll is processed on payday.
What About Garnishments and Deductions in Arrears?
The deductions and company-funded models use a standard 50% of an employee’s estimated net earnings as the balance they make available for transfer, which has the potential of putting a garnishment or deductions in arrears at risk if the employee overdraws on wages.
- Deductions Model
If the employee takes out more funds than he/she is entitled to, there is the risk that the employer may not be able to process the garnishment or recoup the deductions in arrears, or that the payroll team will need to manually reorder deduction priorities.
- Company-Funded Model
For garnishments, the employer could be at risk of overextending its funding and overpaying the employee. For the arrears, if the employee takes out more funds than he/she is entitled to, the employer will either (1) risk not getting paid back or (2) make the product unavailable for those employees. You should check with the provider on how they manage this risk.
What About Pay Stub Reporting?
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As an employer, having a record that you’ve remitted an employee’s full net pay is a critical compliance requirement. That record, the employee’s pay stub, is an affirmative defense if litigation arises for any reason concerning an employee’s pay. Without such a record, you could be at risk of being unable to prove that you remitted full pay to the employee in a court of law.
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Keep in mind too that the Fair Labor Standards Act requires employers to keep accurate records of employees' wages and hours worked for at least three years.
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Under the company-funded model, there is also a risk that the employer will be unable to process a garnishment or recoup deductions in arrears since the employee can take up to 50% of his/her net pay in advance of payday. You should check with the provider on how they manage this risk.
- Deductions Model
The pay stub that an employee receives under the deductions model may include only a portion of the employee’s net pay for the pay period (it is net of any advances). The employer is required to issue a separate pay stub for each advance taken by the employee over the course of the pay period. In addition, under this model, the employee receives advances from the vendor and any remaining pay from the employer on payday. This model might make it harder for the employee to track his/her pay. You should check with the provider on how they manage this risk.
- Company-Funded Model
The company-funded model also comes with the complication that every advance could constitute constructive receipt of wages and, therefore, require a pay stub for wage and hour compliance and filing of tax withholdings. You should check with the provider on how they manage this risk.
- DailyPay Model
DailyPay uses a Dynamic Income Algorithm (“DIA”), a flexible and dynamic available balance calculator, that adjusts to any changes in an employee’s pay profile, including new/existing garnishments or deductions in arrears. As a result, the garnishment (e.g., child support) is safeguarded because an employee wouldn’t be in a position to transfer more than his/her net pay after factoring in the garnishment, taxes and other deductions. The DIA also safeguards the employer’s ability to be repaid any arrears.
Under DailyPay’s model, the employer continues to document an employee’s pay by including 100% of net wages for the employee once per pay period on the pay stub, following the close of each pay period. In other words, an employee’s pay stub whether they use DailyPay or not will look exactly the same. With DailyPay, the employee also receives all advances and any remaining wages due on payday from a single source.
It’s important to consider the differences in the three models when evaluating a daily pay benefit for your employees. You’ll want to be confident that the product you choose is risk-averse and that it meets all federal and state-mandated labor, wage and tax compliance laws.
We host frequent webinars to answer your questions while you’re exploring the daily pay benefit. We invite you to join us for our next one by signing up here.
Jason Lee is CEO and co-founder of DailyPay, a venture-backed HR technology company that is changing the way Americans get paid today. He is a highly sought after speaker in the HR Technology industry, having led keynotes and sessions at American Payroll Association Annual Congress, Evanta CHRO Summit, Connect HR & CFO Leadership Summit, HR Technology, and SHRM. He is a member of the Forbes Finance Council and has been recognized as one of the premier thought leaders in global finance by the International Financing Review and Milken Global Institute. Before starting DailyPay, Jason was managing director at Goldman Sachs for nearly two decades.
