A hot topic of discussion in payroll offices around the country is the prospect of new services that provide workers with immediate access to their wages for hours they have worked but which aren’t due to be paid until after the end of the current payroll cycle. Variously referred to as “Advance Wage Payment,” “Earned Wage Access,” or “Wages-on-Demand” products, these services are becoming popular with employees, especially those who work for minimum wage. Employers who offer the programs often see a boost in employee morale and retention. These programs, however, raise a number of tricky legal issues. Depending on how it is structured, a program may run afoul of lending law or wage and hour rules. Several states are investigating whether certain wage advance providers are violating state law. Companies that are considering offering wage advance benefits to their employees should carefully review the programs for regulatory compliance.
Wages-on-demand products fall into two broad categories. There is a direct-to-consumer model, in which the worker provides wage history and other information directly to the provider and authorizes repayment of the advance from the worker’s bank account. Employers are not involved in direct-to-consumer products and the advance is funded by the provider. Other wage advance programs, however, integrate with the employer who then markets the service to its workers and shares information on hours worked with the provider. The employer may fund the advance and may assist in recouping it through payroll deduction. Employees who use either type of service are usually charged a fee per transaction or a monthly participation fee. Some providers do not assess fees but solicit “tips” from users. There are a number of variations on these models, which makes generalizing about these services difficult. Employers should review the details of a particular program before committing and evaluate whether the proposed program is in compliance with lending laws and state wage and hour laws.
Federal and State Lending Law Compliance
A fundamental issue raised by wages-on-demand products is whether the advances being provided are loans governed by federal or state lending laws. Critics of wage advance programs view them as an updated form of payday lending. The federal Consumer Financial Protection Bureau (CFPB), however, has acknowledged that some wage advance services do not involve an extension of credit and thus aren’t covered by its payday lending regulation. Unfortunately, the Bureau failed to provide detailed guidance on how to determine which business models trigger the rules and which do not. For those wage advance products that are covered by the rule, CFPB carved out exemptions for services that meet certain requirements.
Even if a particular wage advance service is not a lender under federal rules, it may still be subject to regulation at the state level. The New York Department of Financial Services recently announced a multistate investigation of allegations of unlawful online lending in the payroll advance industry with a dozen jurisdictions participating. The focus of the inquiry appears to be direct-to-consumer products and whether they are charging illegal interest rates, disguising fees as “tips” and violating licensing and banking laws.
State Wage and Hour Law Compliance
Wages-on-demand services must also comply with state wage and hour laws. A key question is whether a payment for hours worked, but for which wages are not due until a future date, should be categorized as a payment of wages earned or an advance of wages. If it is a payment of wages, then the employer likely has to provide a detailed wage statement, withhold taxes and other deductions, and ensure the funds are transferred via a permissible method of wage payment. If, on the other hand, the payment is as an advance of wages, then the employer must comply with wage advance and payroll deduction regulations. For example, in New York, an advance payment that assesses interest or charges a fee does not qualify as a “wage advance” and may not be reclaimed through payroll deduction.
Employers offering payroll cards to their employees should make sure the wage advance product they choose is compatible with their card program. A number of states prohibit the payment of wages to a payroll card that charges a fee for the loading of wages to the account. In these jurisdictions, wage advance products that charge a fee may be problematic. Other states prohibit payroll cards from linking to any form of credit, “including a loan against future pay or a cash advance on future pay.” Employers selecting a wage advance product need to be careful not to create problems for their employees who elect to be paid via payroll card.
The Future of Wages-on-Demand Products
Given the uncertainty that surrounds wages-on-demand products under state law, we expect to see legislative activity in this area in the near future. At the moment, only one state is considering a bill to address wage advance products. California SB 472 would authorize wage advances made by qualified providers who meet certain requirements. The National Consumer Law Center (NCLC) initially said it would support the bill if it was modified to authorize only products that are integrated with the employer and prohibit products that directly debit a consumer’s account. NCLC also advocated for tighter restrictions on fees and limits on usage. The legislation was amended in committee but not in the manner NCLC was seeking, and the organization now opposes the measure. While the bill is moving forward in the legislature, its fate is unclear.
Wage advance products are growing more and more popular with workers and employers will face pressure to offer the service.