Why employers need to help workers deal with income volatility

Everyone talks about New Year’s resolutions for themselves. But, as employers whose biggest asset is our team, we should all think about a New Year’s resolution to improve the financial health of our employees.

Like it or not, we increasingly live in a gig economy where flexibility outranks financial security and just-in-time work is the new normal. Even companies with thousands of full-time employees rely heavily on part-time workers, temporary workers, and self-employed independent contractors. These workers allow companies to react nimbly to changing conditions, and they provide expertise for specialized challenges. Many companies also preserve flexibility by paying a significant portion of compensation in bonuses and commissions.

Flexibility can be a win-win situation. But it also increases income volatility, which can impose devastating stress on workers and pose a hidden risk to employers that they ignore at their own peril.

Roughly a quarter of American families suffer a major disruption to their income each year, according to the Urban Institute. Nearly one in five of those families suffer an income drop of 50% or more: a potentially catastrophic shock for low-income families.

But it’s not just these one-time shocks that affect families’ ability to plan and save — it’s the month-to-month fluctuations, as well. The JP Morgan Chase Institute found that, between 2012 and 2015, 55% of the bank’s customers regularly experienced more than a 30% change in income — up or down — from one month to the next. These fluctuations are often a result of flexible, part-time or temporary jobs or of self-employment.

The stress among workers of not knowing how much money they will earn each month can have a serious impact on employers. According to Morgan Stanley, that includes “lost productivity from distracted workers, higher healthcare costs because of stress-related illnesses, more days off, and higher turnover.”

These costs can total thousands of dollars per worker each year, and the root causes are difficult to spot. Few employees want to talk about financial anxiety, such as not being able to pay upcoming rent because of an unexpected medical bill or car repair. But you can rest assured an employee will spend time at work distracted by anxiety and the hunt for solutions. A 2007 study estimated that the cost of “presenteeism” — showing up for work, but being unable to function at peak levels — could be above $8,000 per person per year.

Human resource executives clearly sense the risk. In its 2016 Employee Benefits survey, the Society for Human Resource Management noted: “61 percent of HR professionals polled last year described their employees’ financial health as no better than ‘fair.'”

At The Aspen Institute Financial Security Program and LendUp, we’ve teamed up to figure out how we can elevate this issue and foster actionable solutions. The result is Finance Forward, a multi-city series of events on income volatility that bring together local governments, employers, community advocates and nonprofit leaders. So far, we have studied the issue in Columbia, SC; Lansing, MI and St. Louis, MO.

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We know that employers are best positioned to help families reduce income volatility but unfortunately are also the least likely to act. However, in speaking with national and local employers in each of these cities, we’ve come up with a host of measures that companies and HR managers can use to help employees plan better for volatility and perhaps partially tame it.

Let’s start with an immediate change that’s easy to institute. A big share of volatility, especially for people in low-wage jobs, stems from irregular and unpredictable work schedules. Abruptly canceling a shift can have devastating effects on a part-time or temporary employee. So can a last-minute call to work that forces a worker to scramble and pay for an unexpected day of childcare. The simple act of giving advance notice of a shift change allows an employee to plan ahead and perhaps save money.

Another easy strategy, but one that can make a big difference, is to smooth out workers’ paychecks. Paying people every week instead of every two weeks can reduce the turbulence that comes with “five-week months.” Employers can also smooth out bonuses across pay periods so that workers can make more timely use of their income. Employers can also make it easier for workers to save money in rainy-day funds, automatically enrolling them in savings accounts and diverting a part of each paycheck to those accounts.

And then there are many educational steps employers can take to help their employees make better financial decisions.

LendUp, for example, has begun to offer a financial health day: a half-day when each employee sets work aside in order to make plans and think about his or her financial health, with on-site help from financial advisors and retirement experts. We know that we’ll be in a better position to help our customers if our financial health is in order. Many companies do this, and we’re thankful for the idea.

Coming off of open enrollment season, when we’re all focused on benefits, we should ask ourselves: “What about the real basics of how people are getting paid and an employers’ role in minimizing income volatility?”

Employers can look to financial services companies for help. Many organizations, such as the nonprofits Earn and SpringFour, provide valuable resources for creating financial stability like cost-saving tools and savings solutions. LendUp, for our part, creates educational tools and socially responsible credit products that can get workers on a better financial path.

Still, there is so much more to do. Companies need to consider bolder strategies. They can offer financial incentives to employees who contribute to rainy day funds, as many do now for contributions to 401(k) plans. They can look for imaginative ways to smooth out overtime pay or the end-of-year money that comes from the Earned Income Tax Credit.

Our society is only beginning to recognize the importance of income volatility, but we can be quite sure that volatility is likely to increase, as the gig economy is certain to grow. It’s in employers’ best interest to help workers cope effectively.

Article by Sasha Orloff  of Forbes Councils…  the CEO and Cofounder of LendUp, a fintech company with a mission to provide anyone with a path to better financial health.