It’s a job seeker’s market. Unemployment has been at its lowest level since the start of the pandemic, and workers aren’t demonstrating much urgency to fill vacant slots. Employers need an edge.
Here comes on-demand pay. Employees don’t have to wait two weeks or a month to get paid anymore. They can get access to their money as soon as they earn it.
Businesses wanting to offer this benefit need to be aware of state and federal laws applicable to payday lending and earned-wage advance programs, including the limitations and sustainability of the advisory opinion provided by the Consumer Finance Protection Bureau (CFPB). These rules and guidance address fees, wage recovery and recourse, required disclosures, and more. Knowing them is vital.
Why On-demand Pay Matters
Workers have been under an incredible amount of stress for the last 18 months as the pandemic turned life upside down. Almost everyone has been affected either directly or indirectly. On-demand pay is one way to alleviate the financial stress from the economic turmoil caused by the pandemic.
According to a survey conducted by Bank of AmericaOpens a new window earlier this year, 56% of employees said they were worried about money, 53% said stress interfered with their ability to work, and more than 80% said financial benefits are critical to their financial security.Â
People Want On-demand Pay
A recent surveyOpens a new window of more than 1,000 workers by the HR software company Ceridian found that people of all income levels want to receive their pay immediately.Â
More than three-quarters of those surveyed said they would be more loyal to an employer if they offered free, immediate access to their earnings. Also, 81% said they would be more likely to work for a business that provided free access to earned income than an employer that didn’t.
Because of the growing demand for the service, a host of businesses are offering some type of earned wage access. As the service and costs increase, so will the likelihood of increased regulation, licensing, and supervision. On October 12, 2021, a coalition of 96 consumers, labor, civil rights, legal services, faith, community, and financial organizations, and academics wrote a letter to the Consumer Financial Protection Bureau (CFPB) urging it to revoke or significantly revise two actions taken in late 2020 regarding earned wage access (EWA) products. The group believed that the advisory opinion from the CFPB that declared certain EWA programs not to be â€œcreditâ€ under the Truth in Lending Act and subject to Regulation Z threatened to create loopholes in federal credit and fair lending laws. They also believed it could be misused to promote fintech exemptions in state payday loan law.
Regulations on the State Level
If not managed carefully, earned wage access can become another form of payday lending. California was the first state to show an interest in regulating the industry before the bill stalled in the legislatureOpens a new window at the end of 2020.
New Jersey, New York, South Carolina, Georgia, Utah, Nevada, and North Carolina have all attempted to regulate EWAs as well. Utah’s legislation also stalled in the legislature. The American Payroll Association’s Government Relations Task Force Subcommittee on State and Local Topics supports the bills in Nevada and South Carolina that would enable employers to offer earned wage access (EWA) programs to employees. Both bills require licensing and disclosures.
New Jersey’s state assembly focused on employer-sponsored programs used purely as employee benefits. Its senate still must take up the measure, but a companion bill is pending. The other states have taken approaches like New Jersey’s, and even more states can be expected to take up similar legislation as the popularity of EWAs continues to grow.
Regulations on the Federal Level
The Consumer Financial Protection Bureau weighed in on the issue for the first time in December 2020 when it issued a bulletinOpens a new window providing an advisory opinion on whether EWAs are extensions of credit under The Truth in Lending Act and its implementing Regulation Z.Â
According to the American Bar AssociationOpens a new window , Regulation Z applies when:
- The credit is offered or extended to consumers
- The offering or extending of credit is made regularly
- The credit is subject to a finance charge or is payable by a written agreement in more than four installments
- The credit is primarily for personal, family, or household purposes
To keep from being considered a loan subject to Regulation Z, the EWA has to meet the following requirements:
- Be employer-based
- Cannot exceed the amount of earned, but unpaid, wages
- The wages must be free, although the CFPB indicated that a â€œnominal processing chargeâ€ is permissible without specifying
- Payroll deduction is the only way to recover advanced wages
- If a payroll deduction fails, the business has no legal recourse against an employee
- Users must receive clear disclosures
- No credit checks are allowed
What To Look For in a Compliant Provider
It doesn’t matter if you’re an HR tech platform or an employer; there are some important considerations to take into account before implementing an on-demand pay program. You should determine if the:
- Provider charges interest, fees, or other finance charges for the earned wage advance or to access the funds
- Activity is subject to state and federal regulation and supervision
Consult your legal team to confirm that the on-demand pay provider follows all of the above to ensure long-term compliance.
On-demand pay is quickly becoming the â€œmust-have benefit.â€ The only way to make sure it benefits you and your employees is by vetting the provider thoroughly to ensure they are compliant with all appropriate regulations. Knowing what to look for will help keep you on the right side of the rules.