digital payroll
HR Tech

Who dares to disrupt payroll?

There’s something odd about payroll. Unlike other HR processes, that have been taken apart and reimagined to support a modern workforce, payroll hasn’t fundamentally changed. Sure, we’ve optimized it, outsourced it, and moved from checks to direct deposits and crypto wallets, but it’s never been fundamentally innovated. And that is strange, because the world of work is changing rapidly.

There have always been 2 ways that companies pay people: they sign a contract with a worker, and that worker becomes an employee. From now on, she receives a payslip, and a nett amount that goes to the bank. The company withholds taxes, social security payments and other payments that they are legally obliged to.

The second group we originally termed the “creatives”: highly skilled people offer their services on an independent basis against a fee. The company pays the full fee, and the contractor is responsible for social and tax payments. These services range from sculptors to management consultants, carpenters, and plumbers.

The gig economy changes our way of working

And then work fundamentally changed, when new gig platforms were introduced during the financial crisis. Now, if you have a skill, you can offer your services on these platforms and be paid for them directly: you become a gig worker. The gig economy covers a wide range of services: from Fiverr to Uber, Guru to Toptal, Upwork to Freelancer. These platforms provide people with the opportunity to earn some extra money and set their own terms (with notable exceptions of course). 

These platforms also changed expectations around payments. Although most started out by paying periodic or project completion balances to workers, over time they shifted to a model where workers can withdraw their money early. As soon as a certain threshold is reached, they can request a so-called Earned Wage Advance (EWA). That threshold can be as low as 2 hours of work. And if your side hustle pays like this, that changes your expectations towards your salary payments.

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The gig economy changed our pay expectations

The interesting observation about the gig economy is that it is not either/or for people: you can be an employee and a gig worker. The financial crisis taught people that jobs aren’t guaranteed, and corporations hold the cards: when times are bad, you lose your job. Your financial obligations, however, do not stop. And even though people at first used these gigs to make a living, once the economy rebounded and they found new jobs, they held on to their side gigs. For many, it is necessary to combine several jobs because of low wages. Others never want to rely on one income stream again – they’ve learned that lesson the hard way. And some people simply enjoy the flexibility and versatility.

But, when you draw income from a side gig and you can access that money as soon as you’ve earned it, why does your salary come only once or twice a month? Why does your employer “hold on” to the money that’s yours? When you urgently need access, and you don’t have savings, the only alternative is to borrow money. You could take out a payday loan, but these are problematic due to their high interest rates – and companies are starting to realize in how much financial trouble some of their workers are because of this.

Which means that now payroll innovation is a driver for the employee value proposition: by offering certain features that are attractive to employees, these functionalities can contribute to employee retention and satisfaction.

Pay me now with Payflow

Giving workers access to money earned to replace payday loans is a topic that employers are keen to solve – the “pay me now” feature is becoming a payroll staple as employers better understand how devastating financial problems can be for their employees, and how much it affects their performance. Several payroll companies are looking to solve this, like Everee (which we will discuss next month).

Although EWA originated in Anglo-Saxon countries, it’s now moving to other parts of the world as well. In Spain, Payflow works with employers to offer employees advances on their salary. Using the Payflow App, an employee can ask an advance at any time during the month. Payflow pays the money to the employee and the advance will be withheld from their next paycheck.

This service is valuable to employers, because when their employees will receive these advances, it increases satisfaction and is seen as a good company perk. The company only settles the bill at the end of the month so it doesn’t affect their cash flow. A small fee is paid by either the employee or the employer. According to Benoit Menardo, co-founder at Payflow, this works differently between countries. In Southern Europe, employees are less willing to pay the fee and employers pick it up, while in Latin-Americans employees usually pay the fee.

The advance system allows employees to spend their salary when they earn it instead of waiting the full month. Because they don’t have to wait, they can purchase items when they are on sale, eg train tickets to visit their family or an anniversary gift.

Payflow seems to be more attractive to the younger generation. This system of advances on earned wages is new, and younger people are more quickly adopting it than older employees, who are used to the monthly salary system and have adjusted their spending pattern accordingly.

But giving people access to earned wages is only a temporary fix. The practice does point to a concerning issue, which is that the young employees who use this service do not have any savings in their bank. They have low wages and live paycheck to paycheck. This is also the reason why companies like Payflow are more popular in Southern Europe.

Financial wellness is becoming a topic of interest too. It’s seen as an intrinsic part of “mental wellness” – and maybe the main reason employees are unable to fully focus on work. Benoit and his team recognize the need to make employees more financially savvy and are planning to introduce financial wellness modules next.

Work global, pay local

Another consequence of the rise of the gig workers is that governments are starting to take an interest. Why? Because many platforms classify these workers as “independent contractors”, so neither the platform nor the hiring company carry the burden of calculating and withholding taxes and social security. That’s all on the worker. But when you are obliged to use their app, work when they send you a job and can’t set your own fee, how independent are you?

That’s the question that governments all over the world are now addressing in new laws. And even though countries solve it differently, the general move is towards tighter definitions about who is and who isn’t a contractor or independent and who should be on the company’s payroll.

Many of these gig platforms are global – which means that you can hire people irrespective of their location. And the majority of new startups go global right from the start and skip the “brick and mortar” headquarters.

That gives way to the rise of a new category of workforce services: when you hire and pay people in a country where you don’t have an entity, how do you legally manage and pay them? While you could classify them as contractors, when they work for you fulltime on your systems, that’s slowly becoming impossible (and illegal). Setting up a legal entity for a few employees is costly and not a justified investment if you don’t plan further operations in that jurisdiction.

A number of young companies are solving this issue for employers: they provide EoR (Employer of Record) services in countries around the world and allow you to hire and pay people through their entities. They will handle local legislations, taxes and social security to ensure your in-country workers are treated and paid according to local customs. They can pay your contractors through local bank transfers. And when you grow and create your own legal entity, they can run payroll services for you.    

Omnipresent pays your global workforce

Matt Wilson and his co-founders started Omnipresent to solve the difficulties SMB’s have when hiring and paying people in other countries. In a prior role, he experienced how hard it was to properly pay remote workers and concluded that there must be a better way.

For inspiration, Matt and team looked at the banking industry and learned how the neo-banks are offering a far simpler service by stripping out excess process steps. Hiring and paying people in multiple countries increases the level of complexity: some countries still rely on cash payments while others use direct deposits, and everything in between. The variety in global systems is huge and there are no common data or interface standards. Being ablte to bring in a layer of technology enables the automation of (some of) that complexity and makes paying people scalable, compliant and reliable.

Omnipresent also assumed that remote workers would become mainstream for every knowledge business and international company: yet how do you manage these workers from an HR and payroll perspective? They were right: the pandemic forced the world to work from home and accelerated remote working arrangements.

Omnipresent works on an Employee of Record (EoR) basis, offering a centralized, tech-first approach to administer global workers. They present a central interface to abstract as much of local information as possible. The technology layer improves the client’s and their team’s experience, (just think about answering questions while dealing with time zone issues etc) and also offers a scalable solution when managing the increasing demand for remote workers.

The backend, with integrated HR workflows connected to local expertise, ensures employee contracts adhere to local compliance standards and gives the employer a holistic view of their remote workforce. The company offers a unified experience to clients, from employee onboarding to running payroll.

The team at Omnipresent believe that working remotely will grow exponentially. The pandemic supports this belief and has made companies reconsider where they hire, and employees where they want to live and work. These trends accelerated the business and Omnipresent successfully closed a series A shortly before Christmas 2020.

From service to payroll engine

Omnipresent was right to look at the banking space: we’re witnessing a tornado of innovation in fintech. EWA relies on same day bank transfers, something that wasn’t available a few years ago. The financial industry is going through major disruptions, and banks feel the heat. Companies like Stripe and Adyen are the new unicorns transforming this industry.

And once these companies are done there, it’s only a matter of time before they realize how closely related payroll is, and what they could do for this space. That’s why I was excited to read that Stripe was a major backer behind Check, a company that came out of stealth in early 2021.

Check brings payroll closer to small businesses

When Check revealed themselves to the world in January, their announcement caused a bit of a stir: this is a company that has created a new payroll engine and that’s not something we often see. The founders of Check noticed that software suites for small businesses incorporate all back-office functions but stop short of including a payroll engine. After all, maintaining a payroll engine is complex due to the many changes and a continuous work in progress.

Check is on a mission to make paying people simple. They understand that the complexity in payroll is caused by 3rd entities (beyond employer and employee): governments at the federal and local level, social safety net, filing requirements, transferring payments etc. They set out to create a better infrastructure to handle this process. Check takes on the complexity: taxation, money movement, filing, interfaces with government agencies and provides a simple user experience on top of that.

They feel that now is the right moment to introduce such a solution. Small business clients have matured their operations and use fully automated systems to run their businesses. Secondly, there is a wide array of innovation in fintech. And with payroll revolving around taxes and payments, there is an opportunity to take some of that innovation and use it to improve payroll.

Check isn’t selling their services directly to business owners. Instead, they offer their solution to developers, who can include it in the business suites, so they don’t have to develop and maintain it themselves.

The Check team reasons that business operating systems contain all the inputs for payroll: employee data, hours worked and salary amounts. A small business owner handles the day to day in the system to run the business. But when it is time for payroll, they export the data, upload files to a payroll provider, using a process that is not automated and leads to a break in data movement. If you had a payroll engine within the solution, you keep it all inhouse – wouldn’t that offer a much better experience?

Check simplifies this back-end process to create a more straightforward and compelling offering. As a business owner, instead of moving data to another system, you have a holistic view of everything that is pertinent to your employees.

The big opportunity

With all the startups we looked at, the question remains: who is going to fundamentally innovate payroll? Yes, there are a number of companies that have created a payroll in the cloud. But that’s just location – they recreated the existing process on a new technology and optimized the back-end. Not much changes for the employee apart from maybe a digital payslip.

A couple of years ago, there were high hopes for the new blockchain protocol, and what that would mean for payroll. I wrote a series on blockchain and HR, and took a look at payroll. What was true then is still true today: the blockchain protocol isn’t well suited for the high volume of calculations a payroll engine generates. Developments in this area are limited to moving salary payments to crypto wallets and  international money transfers, processes that benefit from transparency.

Some companies came out on the payroll API side, like Finch and Pinwheel. Finch brands themselves as the single layer for employee data and wants to “democratize” access to the employment infrastructure. Their API seamlessly connects to payroll and HR systems, and allows users of best-of-breed environments to pull data and push changes.

Pinwheel provides the SDKs and APIs that make it easy for users to connect their payroll account to any app. As example, this could allow employees to seamlessly switch direct deposit accounts between banks and help vendors verify their income and employment data. Pinwheel presents themselves as the missing link and it’s worthwhile to check out their story and judge for yourself.

However, there’s a privacy risk involved in making your personal payroll information accessible to 3rd parties and have your PII end up in 3rd party systems. Using API’s to move employee data, especially outside of the company network, should not be taken lightly. 

What’s next?

Technology is not the only disruption we’re facing – the other one comes from workers themselves. All over the world, median tenure is trending downwards. The average millennial changes jobs every 3 years. They also explore other avenues: they might have 2 jobs to pay the bills, have a side business, volunteer and study all at the same time.

If have multiple income streams and multiple deductions, you might pay too much or not enough in taxes and social security, which means corrections at the end of the fiscal year. It also drives more income fluctuation for the government, and more complex income statements from workers. This makes it likely that governments will ultimately introduce new approaches around withholdings, simply because they need to receive money on a continuous and predictable base, and also to keep the process manageable at the workforce level.  

The second area focuses on the link between payments, financial wellbeing and workforce productivity. As employers started to pay attention to employees’ mental health issues, they learned that often there’s a link to a person’s financial health.

Research from the UK’s Money and Mental Health Policy Institute showed that people with mental health problems are nearly three and a half times more likely to have problem debt. And so corporate mental health programs are being developed that include suggestions to build financial resilience and help workers better manage their salaries through knowledge, tools and apps.

Still a lot to do! And not many people see payroll as an exciting space to disrupt – but I think it is and Fintechs offer a source of inspiration. As example, Plaid recently introduced Plaid Deposit Switch to help employees determine where direct deposits go and automate account funding. There is so much room for improvement, and the companies mentioned here are proof of that. It’s a promising start and I’m curious to see what comes next.

Thank you to Benoit Menardo from Payflow, Matt Wilson from Omnipresent and Andrew Brown from Check for patiently answering my questions!

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