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Unemployment rates are at historic lows and the economy is booming! That’s good news for business, right? Yes…and no. While low unemployment creates more demand for the goods and services offered by companies, it also means that employers will have to compete for an ever-shrinking pool of workers. This leaves employers with two options: offer workers better pay or benefits, or lower hiring standards.

The prospect of lowering hiring standards is sure to give employers heartburn since it can increase training costs and potentially decrease productivity, while increasing worker pay and benefits comes with its own costs that can hurt the bottom line. But a new service being offered to employers and their employees touts itself as providing a lower-cost solution.

The idea is simple: give employees the option to tap into the wages they’ve earned on a daily basis rather than having to wait until their next paycheck. This new service referred to as “instant pay” or “daily pay” allows employees to deposit a portion of the pay they earn in a day into their bank accounts or prepaid debit cards at the end of their shift, either through a smartphone or computer. The service is targeted to businesses with hourly workers who often have to resort to seeking high-interest payday loans to pay for necessary expenditures such as groceries or medicine.

So what’s the cost? Depending on the daily pay servicer, costs can be as low as $1 each month per active user. Some servicers allow you to allocate some or all of the service fee to the employee. However, the benefits to employers has the potential to significantly outweigh the costs.

One executive of a company that owns 53 Tampa area McDonald’s noted that due to the shrinking labor pool, job applications were decreasing while their turnover rate was increasing. The company decided to offer daily pay to their workers resulting in a 10% drop in turnover.

But before rushing to sign up for daily pay services employers should be aware of some potential issues:

  1. Administrative Costs – In addition to service fees, internal administrative costs may be incurred due to the more frequent processing of payroll. Payroll deduction calculations may also be impacted since, depending on the daily pay service, deductions may not be taken out of daily pay deposits.
  2. Wage and Hour Laws – To ensure compliance with the FLSA as well as state wage and hour laws, employers will have to reconcile any amounts received by employees through daily pay with the number of hours and total pay they receive for the workweek. It is critical for employers to maintain proper calculation of an employees’ “regular rate” and overtime pay to ensure they do not run afoul of minimum wage and overtime pay requirements.
  3. Indemnification Provisions – Daily pay servicers generally include some type of indemnification agreement. Employers should consider the extent that those provisions require the business to indemnify servicers.
  4. Direct Deposit Requirements – Employers operating in Florida need to ensure compliance with Florida’s direct deposit statute. For example, employees cannot be forced into direct deposit arrangements, so Florida employers should not make daily pay a mandatory condition of employment. Additionally, there are other statutory provisions relating to employee authorization and availability of funds. Any daily pay program needs to comply with these requirements.

With 78 million Americans earning wages on an hourly basis, daily pay services may be an option for employers to use in the competition for hourly workers. As with most new disruptive technologies, the unchartered territory can be fraught with potential pitfalls.