What The MyPayrollHR Debacle Says About Payroll’s Future

Perhaps everyone’s worst nightmare came true for 250,000 employees of 4,000-5,000 small businesses over Labor Day weekend: Payday came, and paychecks didn’t. In fact, it was much worse.

In some cases, the direct deposits appeared briefly in employee bank accounts before being abruptly pulled — as many as three times as the platform responsible for making those direct deposits reversed and reversed deposits in an effort to make employees whole.

Many employees are not only still in the red, but they are facing innumerable late fees and overdraft charges for bills that couldn’t be paid or that were paid and bounced.

MyPayRollHR, an Albany-based payroll company and the alleged perpetrator of this nightmare, abruptly closed shop last week, along with its parent company, ValueWise, without any explanation or warning. Representatives of both firms have been radio silent since the scandal started unfolding.

According to long-time MyPayRollHR business partner Cachet Financial, which handles payroll disbursements, MyPayrollHR’s CEO Michael Mann (or someone at the company with a large base of power) manipulated account numbers and moved workers’ money into a personal account for the purposes of embezzlement.

For all the lack of reaction for MyPayRollHR, however, there has been plenty of reaction elsewhere.

The FBI is formally investigating the issues, and New York Gov. Andrew Cuomo promised that “we will not allow these bad actors to take money away from the hard-working people in this state.”

Cachet has sworn it will reverse the reversals as quickly as possible and get employees made whole again soon.

And DailyPay, a NYC-based financial technology company that enables employers to provide on-demand access to employee wages, has created a $25,000 fund to pay for overdraft and/or late fees for those affected employees, up to $100 per employee.

“This was a clearly aberrant fraud event,” DailyPay CEO Jason Lee told Karen Webster in an interview. “It is also everyone’s worst nightmare and evidence of a full-scale system failure at this particular company.”

It’s also a spectacular failure that Lee said will be easily mopped up, which is why DailyPay decided to enter the field and offer relief through this $25,000 fund. Workers living paycheck-to-paycheck who have been hit by this, and the businesses that employ them, need an immediate solution. But however notable this massive cataclysmic failure is, Lee said, it also throws light on all the failure of the bi-weekly payroll system as it exists, and the need to replace it with something better.

Good Intentions Can’t Solve Slow Processes

The problem with Cachet’s promise to help employees and businesses bitten by the event isn’t that it is insincere — Cachet absolutely intends to get those funds flowing back out to the right recipients as soon as they possibly can. The trouble, Lee said, is that ASAP in this context is not very fast.

“What this really gets to is that the money transfer system doesn’t work seamlessly like that,” he said. “The most non-technical way I can say it is that ACH deposits and reversals are a very glitch, batchy type of thing.”

The reason this has been going on for about a week, and is likely going to stretch well into this week, is that when one tries to reverse a payment on the ACH system, it takes a standard three days to do so. It then usually takes another day to be sure that process has happened, and then another couple of days to issue the payment again.

Throw things like weekends and holidays in there when money doesn’t move at all, and one is left with a long waiting game for funds. In this case, 250,000 consumers are sweating it out.

Three-quarters of consumers live paycheck-to-paycheck and cannot handle a major financial shock of $400, Lee said. Not having the money show up to pay bills is only the first in a series of dominoes falling as bill aren’t getting paid.

“People are just racking up overdraft and late fees,” he said. “That is why [DailyPay] set up the relief fund because we have long experience in this industry, and we know money doesn’t move even if you have the best intentions to move it. It’s still going to be a five- to seven-day process.”

Five to seven days are going to create months of financial heartache for workers, and for the businesses that employ them, he noted. Right now, he said, there are thousands of SMB owners scrambling to take on loans, hit their personal accounts and stitch together some solution to get their payroll paid out immediately.

The ones that can’t, he said, aren’t opening at all. Some will never open again.

Fixing the Failing System

Some of the events of this week are incredibly unusual failures, which is why they made the news, Lee noted. A CEO going full Ocean’s 11 and pulling a heist within their own organization is certainly a Black Swan event in the world of payroll operations.

But the underlying problems that make this situation such a rapidly escalating catastrophe, Lee said, are the issues incumbent on a payroll archetype that is just out of step with what workers and SMBs need.

“We don’t think people should be getting paid every two weeks to begin with,” he said. “If we are really looking down on this fracas, what we see is ‘Boy, oh boy, do people really care about getting paid because so many are living on the edge financially and can’t afford any disruption.’”

In an ideal world, he said, people won’t be getting paid in big lump amounts every two weeks — money that they then need to immediately use up all at once to pay everyone they owe. DailyPay’s reason for existing, he noted, is a belief that if you can change the cycle of payments — and make the money for work completed available when it is needed — you can remove the pain of waiting.

Ultimately, he noted, paying workers this way helps them be better stewards of their own money. While one set of DailyPay’s customer base is looking for a quick advance on their pay for a specific reason (i.e. they have come up short and need access to additional funds), that is not the entirety of their customer base. Many of their customers, particularly among the millennial and Gen Z population, aren’t looking to cash out all that often, or for any particular purpose. What they want, he said, is what they consistently want across their lives as consumers: options for access.

“These folks don’t want to take the money any more than they want to listen to all 10 million songs on Spotify,” Lee said. “They take the funds when the need them, and usually at no other time. We see in our data they open the app six times a week, but they may make one transfer. What they want to see is that the option is there.”

Workers first and foremost want to be paid, and the MyPayRollHR debacle demonstrates how devastating it can be when that basic need isn’t met. But the future of paying workers, Lee said, isn’t going to be a faster, less-glitchy version of an old batch system. It won’t be built on workers simply getting paid; it will be built on workers having control of when they get access to their wages.