Innovation Spotlight: Instant payroll is a win-win for both employers and employees

As the FedNow^® Service network grows, the Innovation Spotlight series explores use cases that are changing the way businesses and consumers make payments. This edition covers the benefits of instant payroll with insights from PayrollOrg (PAYO) (Off-site), a nonprofit professional association that provides payroll education, publication and training to more than 20,000 members, and Gusto (Off-site), an online payroll and HR solutions company that serves more than 400,000 small- and medium-sized businesses.

Payroll is often the largest recurring cost a company undertakes — and paying employees accurately and on time is crucial to maintaining a thriving business. Delays or errors that impact access to wages can strain the relationship between employer and employee and have a detrimental effect on an employee’s job satisfaction, productivity and financial well-being. In fact, 88% of employees report some degree of financial stress, according to LearnLux’s Financial Wellbeing in the Workplace study (Off-site), which suggests that a delay in getting paid could have serious consequences for an employee.

Businesses can now work with their financial institution and other organizations to leverage instant payments via the FedNow Service, modernizing the payroll process and providing workers with quick and seamless access to wages.

Immediate wage access can improve employee experience

Using instant payments for payroll allows a business to improve employee experience by ensuring workers are paid accurately and on time while eliminating the risk of late payments. With instant payments via the FedNow Service, employers aren’t limited to traditional payroll schedules and can transfer funds to employees immediately. In other words, they can pay employees for wages earned — or for one-off payments like expense reimbursements or bonuses — any time of day, any day of the year.

The instant nature of these payments ensures an employee has access to their money immediately after the employer sends the payment — versus a check or direct deposit that may take hours or even days — which can help employees gain more control over their money and reduce financial stress.

To meet the demand for instant payroll options, Gusto, for example, recently introduced an Instant Pay feature (Off-site) that offers employers and their employees more flexibility and choice with payroll payments, ensuring businesses can confidently make wages available to their employees on time.

“Taking friction out of payroll payments can go a long way in keeping employees happy, which in turn has a positive impact for businesses,” said Samant Nagpal, head of payments and risk for Gusto. “We fundamentally believe that businesses thrive when their people thrive, and payroll plays a crucial role in the employer-employee relationship.”

Additionally, by offering instant payments, employers can meet employees’ growing expectations for same-day payroll in today’s always-on world.

“Our culture has evolved, and we are used to getting things very quickly — we want everything immediately,” said Ronn Gilson, a payroll professional and committee co-chair of PAYO. “In the long run, employers are going to have to have instant payroll in their arsenal of benefits they offer employees.”

Improve cash flow and gain a competitive advantage

With instant payments, money is transferred immediately, so there’s no need to hold up money for payroll days in advance of payday, allowing businesses to keep that money in their business for longer while still feeling confident their employees will be paid on time.

“Cash flow is the lifeline of small businesses, and for a small business, running their payroll many days in advance can really take a punch out of their pocket,” Nagpal said.

Gilson agreed that instant payroll plays a positive role in cash flow management for companies. “Keeping money for an extra day in a savings account can help a business earn a little bit of interest, while still being able to pay the employee in a timely and accurate manner,” he said.

Offering instant payroll not only brings benefits to an employer from a cash flow and operational perspective, but can also provide a competitive advantage. Employers can use instant payroll as a way to differentiate themselves to prospective employees, which can help them attract employees and reduce attrition.

In fact, 79% of workers would be willing to switch to an employer that offers earned wage access, according to a 2019 Visa Insights Earned Wage Access Preferences Study (Off-site).

Instant payments offer payroll process flexibility

Using instant payments for payroll sheds the constraints of rigid timelines and allows companies to pay employees in the way that works best for their business and workers.

“We’ve been hearing from business owners that there is a need and desire to be able to make pay runs when they can and how they want, rather than being restricted to specified timelines of the traditional payments infrastructure,” Nagpal said.

In addition to offering a more modern, less restrictive payment process, instant payments can help mitigate issues that may arise during a traditional payroll run and ensure employees get paid on time, even if issues arise.

“If there's a hiccup in the system, a company can use instant payments as a backup and still get payroll out on time, which makes a huge difference,” said Alice Jacobsohn, director of government relations for PAYO.

Leveraging instant payments to maintain compliance

Staying compliant with payroll regulatory obligations is crucial. When it comes to termination pay or an employee submitting their time late, for example, instant payments can help ensure a business meets federal and state requirements.

“I think one of the big benefits of instant payments is helping with compliance,” said Bruce Phipps, a payroll professional and committee co-chair of PAYO. “With instant payments, you've got a little bit of leeway where you can either fund a pay card or deposit funds the same day into somebody's checking or savings account.”

Instant payments can reduce the lead time needed to make payroll payments, increase efficiency and reduce the stress around meeting compliance, allowing companies to focus their energy on higher-value efforts.

“With instant payments, a business can spend their time and energy on running their business rather than having to worry about compliance,” Nagpal said.

Instant payroll use cases

There are many use cases for instant payments in the payroll industry. Businesses, payroll providers and financial institutions can work together to innovate and enable the use cases listed below, among others.

different use cases in which instant payments may be used

FedNow Service participants are tailoring the use cases they support to fit the needs of their customers, members or employees. How will your organization innovate with the FedNow Service?

Additional resources

Download the FedNow Service Payroll and Earned Wage Access resource (Off-site) to explore opportunities gaining traction.
Read an interview with a fintech providing earned wage access to employees.
Browse the Service Provider Showcase (Off-site) to find service providers that advertise the ability to support financial institutions and businesses in payroll processing with instant payments.
Explore the Use Case Arena (Off-site) for information about additional instant payment use cases.
Contact your relationship manager to discuss how your organization fits into the instant payments ecosystem.

The Innovation Spotlight series demonstrates the ways financial institutions, certified service providers and ecosystem providers are driving innovation with the FedNow Service. To learn more about innovative FedNow Service use cases, read other use case spotlights.