Salary advance schemes: The big debate

With the recent rise in organisations implementing salary advance schemes, People Management asks experts for their thoughts

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Salary advance schemes are having a resurgence as a result of the cost of living crisis, with the topic now common in conversation amongst people professionals. Big-name employers such as Tesco, Compass Group, Bupa, ASK Italian, and Zizzi have implemented the schemes, placing the need to care for low-paid employees under the spotlight.

Previously prevalent in the hospitality industry, salary advance schemes allow employees access to some of their earned salary before their normal payday, and this is typically done through a third-party, for a small fee.

There are some nuances between different schemes, though; some involve paying individuals more frequently, while others require a more traditional 'advance'.

As an example, Tesco's scheme, for which it uses a partner company, allows its employees to access up to 25 per cent of their monthly earnings early, for a fee of £1.49 per transaction.

And, while the salary advance industry is in its infancy, The Financial Conduct Authority (FCA) says it expects it to grow rapidly, initially across the hospitality, retail and healthcare sectors.

But, while the schemes are increasing in popularity, they are proving to be a polarising issue as on one hand, they help employees out of a financial jam, but on the other, there are many ethical and practical considerations.

So, should more employers be offering these schemes? Could they help struggling staff to cope with the cost of living crisis? Or are they ultimately causing more harm than good?

The benefits of salary advance schemes

Weighing up the pros and cons of salary borrowing, Guy Pink, HR lecturer, writer and consultant, said the positive impact of such schemes depends on the fee being imposed. But, he adds, “if it helps employees to budget and get through the next 12 months then it has to be a good thing”.

Helen Astill, HR services director at HR Solutions, sees the advantages of such schemes when employees need “a one-off loan in advance of payday”, adding that “some employers have run informal advance loan schemes for many years and these are mostly used in situations where, perhaps someone has started a new job, but just missed payday and so needs some assistance to bridge the gap until the next month”.

Echoing Pink's point, Steve Herbert wellbeing and benefits director at Partners&, says: “it’s got to be good news if employees can – when really needed - access a little of their salary early instead of having to borrow money from other sources, and in particular to avoid falling under the control of those deeply unpleasant loan-sharks that have been much in the news this week.”

Alexandra Farmer, head of team and solicitor at Worknest, accepts that many employees are likely going to need to look at additional borrowing over the coming months (and possibly years): “This could be through salary advance schemes, credit cards, store cards, loans, etc. If an employee needs support for a short-term advance for an emergency/undelayable cost, then a salary advance scheme may be a suitable option,” she says.

The risks associated with salary borrowing

With the use of salary advance schemes sometimes being promoted as a means to cope with the cost of living crisis, Chris Preston, director and co-founder of The Culture Builders, says: "Advance schemes are not the way to battle increasing living costs – using them in that way is simply another version of payday loans, without the interest”.

While sharing that advance schemes are viewed “with cautious positivity by many people teams,” Preston adds that they were “never intended to allow people to borrow from themselves to cover living costs that are unsustainable. [This] latter approach just doesn't stand up”.

Astill also shares: “The advent of these new schemes worries me because they are not regulated and once employees have used such a scheme, they may become reliant on them and get deeper into debt, particularly if it is easy to access the funds.” 

And, that concern around the lack of regulation – which The FCA says may be formally needed in the future – is one shared by many, as conversation around employee's financial health growing.

Martin Tiplady, managing director of Chameleon People Solutions, also confesses that he is not a big advocate of salary advance schemes.

“The schemes may, on one hand, be seen as helpful in the current climate and so closely linked to cost of living, but in reality, they are not the answer and could easily allow a worse position to develop for an individual,” he says.

Tiplady adds that “they encourage a level of debt when there might be other things like better wages, debt management advice, and other matters more geared to understanding how people might survive this period.”

Key considerations

Clearly there's a lot for the profession to consider when choosing whether or not to  offer or endorse a salary advance scheme. 

“I would much rather employers point their employees with finance problems to one of the free debt counselling services who have the expertise to help them address the root cause of their money problems”, Astill tells us.

Seeing these schemes as “just a short-term fix,” Astill is encouraged by that the Financial Conduct Authority taking an interest in these emerging schemes, “and I hope that they will in time become regulated so that employees using them will be protected from getting into significant debt," she adds.

Herbert advises that HR professionals might want to “place limitations as to how frequently a salary advance service can be used, seek to provide support and interventions as needed, and importantly try to help employees to take control of their finances by supporting workers on the journey to financial wellbeing through guidance, education, and signposting to professional support,” adding that “other tools such as discounts on everyday shopping and expenditure can make a real difference if well-communicated too”.