What is payroll and how does it work?

Payroll is a relatively new system that allows workers to skim money off of their existing wages. This is a straightforward way employers can provide financial support to their employees. This can manifest itself in cash advances, plans, and cases where employees are allowed to withdraw money before their payment date.

Salary finance is an employment benefit organizations can offer to their employees, also known as an EAP (Employee Assistance Program). As the employer market becomes more competitive than ever, employers are looking for new ways to engage potential employees while maintaining motivation. Nowadays this usually extends to the offer of financial aid as well as health insurance and vouchers.

How does it work?

Salary financiers provide software that can be integrated into the company itself and that gives employees the option of withdrawing money before their payment deadline. For example, if an employee normally receives a wage on the 28th of each month but needs additional funds on the 14th, payroll allows them to withdraw their income for 14 days, which means they have access to what they get during that month earned.

This means that employees have constant real-time access to money through payroll funding. The concept is currently growing in the UK, US, Australia and South Africa, with more companies and startups using payroll software than ever before.

How much does the payroll cost?

Payroll software prices may vary. The company is usually charged an onboarding fee, after which companies typically pay £ 1 a month per employee to access the software. Employees will then have to pay around £ 1.75 each time they withdraw, which is similar to an ATM fee when withdrawing money abroad.

Who uses the payroll?

Salary finance is used by large employers that include the police, hospitals, gyms, and supermarket and restaurant chains. Typically, the software is popular with companies whose employees struggle between paydays. For larger groups, payroll software is a cost-effective alternative to loans or credit card overdrafts, which typically have very high interest rates.

What is the Difference Between Salary Finance and Payday Loans?

While payroll allows employees to withdraw their own wages between paydays, payday loans allow them to borrow money before their payday and repay the loan with interest on their actual payday. Payday loans usually have the highest APR on the market, over 1000%, although they are often only used for a few weeks or months and then ideally paid back in full.

Payday loans are used by over 3 million people in the UK and many are willing to pay a high interest rate for the convenience and quickness of the funds. One of the main advantages of the advance salary or payroll funding is that it is interest free and the employer pays all transmission fees and it is considered an employee benefit.

John Gauthier of Hoopla explains:

“Payroll is certainly an inexpensive alternative to expensive payday loans and could become the future of cash advances and short-term borrowing.”

“However, employees have to curve how much and how often they take out, or they could get into a similar spiral on payday loans where they are constantly in arrears with payments and chasing the next cash advance.”

“Most payroll programs allow employees to take up to 40% of their salary each month, but this should be carefully monitored and excessive dependency avoided.”

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