5 Employee Pay Methods to Consider

Regardless of what type of pay structure you use, you need a reliable way to compensate employees for their work. Timely payments show team members that you value their contributions and follow through on your commitments to help improve morale and contribute to reduced employee turnover.

This article about employee pay methods describes five common employee pay methods and their advantages and disadvantages.

5 Common Employee Pay Methods

Some employers use one pay method for all employees, while others allow team members to choose from several options. These are some of the most common employee pay methods in use.

1. Physical paycheck

A paper paycheck is the traditional method of paying employees. For each pay period, you process payroll, print checks and distribute them to employees. Some companies distribute checks in person, while others mail paychecks.

One of the biggest advantages of a paper check is that it’s simple and familiar. Employees who don’t have bank accounts can use check-cashing services, making physical paychecks one of the most accessible payment methods for employees. Additionally, employees don’t have to provide their bank routing numbers or account numbers to receive paper checks from your company. This can also help eliminate privacy concerns.

Although paper checks have some advantages, they also have these potential drawbacks:

• Slower: An employee has to take a check to the bank or deposit it via their bank’s mobile app. Some banks put holds on checks over a certain amount, which can prevent employees from accessing their funds right away.
• Time-consuming: Processing paper checks is time-consuming, especially if you have many employees. After processing payroll, your accounting or HR team has to print checks and distribute them.
• Increased cost: Creating physical checks adds to your payroll costs, as it requires checks, a printer and ink. Envelopes protect the information printed on each check, but they add to the total cost of using this payment method.
• Delays: If employees aren’t at work on payday, they have to wait until they get back to receive their pay. If you mail paychecks, they might get delayed or lost in the mail, preventing employees from accessing their funds.

2. Direct deposit

With direct deposit, employees give you their banking information. When you process payroll, you send each employee’s earnings to their bank account via electronic funds transfer (EFT).

This payment method offers several advantages:

• Instant access: As soon as the EFT lands in the employee’s account, they have access to the money.
• No lost checks: Because there’s nothing physical for the employee to receive, there’s no risk of them losing the payment like they could with a paper check.
• Faster processing: Once an employee provides their banking information, it takes little time to process a direct deposit.
• Lower cost: Direct deposit can be one of the cheaper methods of paying employees because you don’t need any supplies. Some payroll software companies offer direct deposit with no additional fees, making it even more cost-effective.
• Paper trail: Direct deposit leaves a convenient audit trail, and it’s easy to identify mistakes when they happen.

Direct deposit also has some potential disadvantages. For example, you might want to consider payroll timing when choosing an employee pay method. If you don’t process payroll early enough, employees may not receive their EFTs on payday. Some employees are also hesitant to share their banking information due to privacy concerns.

3. Cash

Paying your employees in cash isn’t common, but it’s a viable option. One of the biggest advantages of cash payments is that you don’t have to pay for supplies or processing fees. Employees also gain instant access to their funds. However, paying employees in cash has some drawbacks:

• Lack of paper trail: Other payment methods provide an automatic paper trail, making it easy to track deposits or cashed checks. Cash payments leave no paper trail, but you still need to create payroll reports and keep them on file.
• Loss potential: Having large amounts of cash on hand can make your business more vulnerable to theft. Employees might also lose the cash before they spend it or deposit it in the bank.
• Inconvenient deposits: If an employee wants to deposit their money, they have to make a trip to their financial institution, which adds an extra step to getting paid.
• Time-consuming: Recording cash payments can take more time. You also have to physically hand over the cash, which is also time-consuming.

4. Payroll card

Payroll cards are similar to debit cards. On payday, you load each employee’s card with the earnings for that pay period. Employees can use the card to make payments or withdraw cash at an ATM.

Consider these pros of using payroll cards:

• No bank account needed: An employee doesn’t need a bank account to spend money stored on a payroll card.
• Instant access: Employees can spend the money as soon as it’s loaded onto their cards.

Despite their advantages, payroll cards may not be a good match for your employees’ needs. If an employee loses their card, they also lose access to their money, which can prevent them from paying bills on time. You may also have to pay a setup fee or a fee every time you pay employees. Some cards charge fees for ATM withdrawals and other services, so employees might receive less money with this pay method than they do with other methods.

5. Mobile wallets

A mobile wallet is a digital account that gives employees access to their wages. Mobile wallets typically have features designed to help employees manage their finances, such as savings programs, financial coaching and expense tracking. You can also use mobile wallets to distribute pay stubs and digital tax documents.

Pros of mobile wallets

Consider these advantages of using mobile wallets:

• Enhanced accessibility: Using mobile wallets makes it possible to pay employees who don’t have traditional bank accounts.
• Reduced costs: It costs less to pay employees via mobile wallets than it does to print and distribute paper checks.
• Improved satisfaction: Offering expense tracking and tools to increase financial wellness shows employees that you care about their well-being. This might increase satisfaction among some of your team members.
• Ease of use: With a compatible device, an employee can easily track payments and access information about payroll deductions.

Cons of mobile wallets

Mobile wallets have these disadvantages for employers:

• Device requirements: Employees need compatible smartphones or other digital devices to receive payments made via mobile wallets. This payment method also requires reliable internet access.
• Technological issues: It’s possible for a payment app to crash or have bugs that prevent it from functioning properly. If these issues persist, employee satisfaction may decline.
• Employee comfort: Not all employees are comfortable downloading an unknown app and giving it access to their personal information.

How to choose a method for employee payments

Deciding how to pay an employee isn’t always easy. Consider these factors when comparing payment options.

• Employee preferences: Asking for feedback can help you choose a payment method that meets most employees’ needs. For example, if you learn that many team members don’t have bank accounts, you might decide to use paper checks instead of direct deposit.
• Fees: If you’re interested in using payroll cards or mobile wallets, you might want to contact several providers to ask about their fees. A provider may charge a flat monthly fee or a fee for each employee you pay. Consider asking about setup fees and other one-time charges.
• Time commitment: Time-consuming payment methods create more work for your payroll department. Some methods also make it more difficult to maintain paycheck records. Electronic options sometimes cost a little more, but they can save time, so they may be worth it for your business.