There is a new type of payment product that gives workers immediate access to wages even if their next payday isn’t scheduled for a week or more. These products are called wages-on-demand, advance wage payment, earned income access, wage-based and work-based advances, etc. They all make it possible to deliver payments within minutes of a worker’s request.
Studies show many people live paycheck to paycheck, cannot cover an unanticipated expense of a few hundred dollars, and lack access to credit at reasonable rates. For them, immediate access to earned but not yet due wages can be an important benefit. Immediate access products are popular with gig workers who want to be paid immediately at the end of their shift.
Although they seem simple, they are complex financial products that raise a number of legal issues. Because there are many different business models in the marketplace, understanding the framework of a particular service can be challenging.
This blog describes how these products work and identifies legal issues employers should be evaluate before participating.
Wages advance products are in two broad business models: direct-to-consumer and employer-integrated.
The direct-to-consumer works by the worker directly giving the provider work history and other information. The provider funds the advance and gets paid by charging the worker’s bank account on the next payday.
The employer-integrated model works by the employer marketing the program to its workers and sharing information on hours worked with the provider. The employer may fund the advance and assist in the collecting the advance through payroll deduction. Some programs charge a monthly participation fee while others charge a fee for each transaction. There are multiple options for how quickly the employee may get the advance, with slower payment methods (one to two days) having lower or no fees and faster payment method (a few minutes) being more expensive. The employee usually pays the fee. Some providers allow the employer to subsidize some or all the cost. There are variations on these products and providers describe them in different ways. Some describe the service as providing an advance of wages already earned, others as the purchase of an asset (future wages), and others as an assignment of wages. Employers should review the details of any service to determine exactly what legal rights and obligations they are taking on.
A big question is whether the advances are loans under the federal Truth in Lending Act (TILA) or state lending laws. Some say no because they don’t charge interest or because there is no recourse against the employee except the wage deduction. The theory is that using a single payroll deduction instead of debiting a consumer’s a bank account stops the provider from being a “creditor” under TILA regulations. Critics see them as an updated form of payday lending. Opponents are especially concerned about models where the worker authorizes the provider to debit a bank account. Such automatic withdrawals often lead to overdrafts which can create additional bank fees and penalties.
In its payday lending rule, the federal Consumer Financial Protection Bureau (CFPB) acknowledged some wage advance services may not be a loan. CFPB that there is a “plausible” argument that there is no extension of credit when an employer allows an employee to draw accrued wages ahead of a scheduled payday and later reduces the employee’s wage payment by the amount drawn. The argument is stronger when the employer does not reserve any right to recover the advance other than the payroll deduction.
Even if a particular wage advance service is not a lender under federal rules, it may still be subject to state regulation. The New York Department of Financial Services (NYDFS) has announced a multistate investigation of allegations of unlawful online lending in the payroll advance industry with a dozen states participating. The NYDFS investigation will focus on whether companies are violating state banking, licensing, payday lending, and other consumer protection laws. They will look at whether wage advance programs collect unlawful interest rates regardless what they are called and whether collection practices generate improper overdraft charges for consumers.
Wage-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, is a payment of wages earned or an advance of wages. If it is a wage payment, the employer has to withhold taxes and other deductions, ensure funds are transferred legally and maybe provide a detailed wage statement. If it payment is as an advance of wages, the employer must comply with wage advance and payroll deduction regulations. For example, in New York, an advance payment charges interest or a fee is not a wage advance and may not be reclaimed through payroll deduction.
Some business models have the employee assign their wages to the provider—a practice which is not valid in all states. Wage assignments are illegal in some states and regulated in others. In California an assignment of wages to be earned is valid only if it is for the necessities of life. Ohio limits the assignment of future wages to paying court support. If the employee is married, some states require spousal consent. A provider may characterize the wage advance as the sale of an asset avoid the wage assignment issues. Some states call such a transaction a loan. In Alaska and Florida, for example, the sale of wages is a loan secured by an assignment of wages and the amount the wages exceed the amount paid is interest.
Employers offering payroll cards to employees should make sure the wage advance product is compatible with the card program. Some states prohibit paying wages to a payroll card that charges a fee for loading wages to the account. Other states prohibit payroll cards from linking to credit, including a loan against future pay or a cash advance on future pay.