Treasury Today Country Profiles in association with Citi

Payroll in the ‘gig economy’

Piggy bank standing on a pile of coins

The growth of the gig economy in recent years has not only changed employment practices, it has made payroll processes a lot more complex.

Up to 30% of people in the US and Europe are ‘gig workers’, according to a 2016 McKinsey & Co report into the growth of the gig economy. These people are either relying on temporary jobs as their main source of income, or they are moonlighting as gig workers outside of their full-time employment.

The rise of the gig economy is transforming employment practices. But what is often overlooked is the complexity that using gig workers brings to payroll processes. Something that if not managed correctly can add inefficiency and increased costs to what was once a stable process.

Spotlight on the gig economy

The gig economy is not a new phenomenon; freelance work has existed for decades in industries such as news and publishing. What is different today is the size of the gig economy and its rate of growth.

To put this into perspective, a recent study from the Metropolitan Policy Program at the Brookings Institution found that employment in the US gig economy is growing far faster than traditional payroll employment. And if we zoom into a city like London, data from the New Economics Foundation shows that the gig economy has increased by almost three-quarters since 2010, today employing around 65,300 people.

Driving this change, in part, are advancements in technology and connectivity. These are making it much easier for companies to dynamically match labour supply with demand. Companies are also able to make it easier for gig workers to work for them. Take Uber, for example, people can start working for them almost immediately by downloading an app and going through some checks.

For gig workers, this form of employment can be attractive because it enables them to work when and how they want. It is especially popular with young people and students.

There are clear benefits for employees also. The flexibility of gig workers means that businesses only pay for work when there is a need. They can also avoid many of the costs associated with hiring full-time staff. It would be remiss not to mention that this is currently a contentious issue though; much has been made about the legality and treatment of gig workers of late in the UK.

What challenges does this pose to finance teams?

Despite the benefits that gig workers can offer businesses, Bhupender Singh, CEO at Intelenet Global Services says that “they also make basic finance functions such as payroll more complex”. This is because a flexible worker will not have a fixed wage coming in at the end of every week or month. “When they get paid, and for how much, will continuously fluctuate,” adds Singh.

This unpredictability can make cash forecasting more complex. “A fluctuating level of outgoings, which is usually unpredictable, can results in the finance department not having an accurate picture of all outgoings and will thus impact the accuracy of the cash flow forecast,” says Singh. Any inaccuracy begins to seriously hamper the financial team’s ability to manage its liquidity and drives incremental costs.

Unlike full-time staff who know to expect payment at the end of every week or month, gig workers often want a more immediate payment for their services. Indeed, a 2016 study by Experian revealed that of 1,002 freelancers, 46% were stressing about having enough money to live on, with freelancers each owed an average of £5,431 in late payments. Almost half of these were considering leaving their line of work because of these issues.

Paying gig workers in a timely and convenient fashion poses another challenge for finance teams. Without an automated process in place, they will need to make many ad hoc payments. This will require staff to make these payments. And, depending on the payment method used, may also create further costs for the company.

Financing the gig economy

To overcome cash flow forecasting difficulties, finance teams at companies that employ just a few gig workers can potentially regard these as full-time staff in their forecasts. This will ensure that adequate cash is in place to pay these workers. Any surplus cash can then be re-invested.

This crude method is not ideal, especially if the company scales up its usage of gig workers. Singh, therefore, implores finance departments to review their technology stack. “Finance teams require sophisticated solutions that measure the amount of work the gig workers are providing, allowing them to more accurately forecast and plan their cash flow.”

On the payment side, corporates may wish to look at a number of different solutions to pay gig workers in a timely and low-cost fashion. Payroll cards, for instance, can be used as an alternative to other costly paper-based payments. These enable companies to load the employees’ pay onto the card, making funds immediately available for the employer.

Companies can expect newer solutions to be developed that solve this challenge. Fintech companies such as dailypay and hyperwallet are already making strides in this area. This will only continue as faster payment rails and incoming regulations, such as PSDII in Europe, allow fintech firms to develop over-the-top services that solve this issue for both the company and the gig workers.

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