From the intersection of the gig economy, faster payments technology, and legislators’ failure to address the dearth of small-dollar credit options, there has emerged a new type of payment product that gives workers immediate access to their wages even if their next payday isn’t scheduled for another week or more. These products go by a number of names—wages-on-demand, advance wage payment, earned income access, wage-based and work-based advances—but all make it possible to deliver payments within minutes of a worker’s request. Studies tells us that many people live paycheck to paycheck, would not be able to cover an unanticipated expense of a few hundred dollars, and lack access to credit at reasonable rates. For these workers, immediate access to wages that have been earned but are not due to be paid can be an important benefit. Immediate access products are also popular with “gig workers” who drive for rideshare companies, deliver food and groceries, or perform other piecework tasks and who want to be paid immediately at the end of their shift.
At first glance these products may seem simple and straight forward, but they are in fact complex financial products that raise a number of novel legal issues. Because there are so many different business models in the marketplace, discerning the legal and operational framework of a particular service can be challenging. Without such information, business lawyers may have difficulty assessing the legal risks these new products posed to workers and employers. This article describes how these products work and identifies several potential legal issues that employers and financial institutions should be evaluate before participating in one of these programs.
How Do Wage Advance Products Work?
Wages advance products fall into two broad business models: direct-to-consumer and employer-integrated. In the direct-to-consumer model, the worker interacts directly with the provider who collects work history and other information from the consumer. The provider funds the advance and recoups it by debiting the worker’s bank account on the next payday. In the employer-integrated model, the employer markets the program to its workers and shares information on hours worked with the provider. The employer may also fund the advance and may assist in the collecting the advance through payroll deduction. Some programs charge a monthly “participation” fee while others assess a fee for each transaction. Frequently, there are multiple options for how quickly the employee may receive the advance, with the slower payment method (one to two days) having a lower or no fee and the faster payment method (a few minutes) being more expensive. The employee usually pays the fees but some providers allow the employer to subsidize some or all of the cost. There are a number of variations on these models, and providers describe their products in different ways. Some characterize 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. Employees and employers should review the details of any services they are considering to determine exactly what legal rights and obligations they are taking on.
Are Wage Advance Products An Extension of Credit?
A fundamental question raised by wage advance companies is whether the advances being provided are in fact loans governed by the federal Truth in Lending Act (TILA) or state lending laws. Some proponents of wage advance products argue that they are not forms of credit because they don’t charge interest (although they may charge fees or accept “tips”) or because there is no recourse against the employee except the wage deduction. One theory is that the use of a single payroll deduction as opposed to debiting a consumer’s a bank account prevents the provider from being deemed a “creditor” under TILA regulations. Critics of wage advance programs view them as an updated form of payday lending. Opponents are especially concerned about models in which the worker authorizes the provider to debit her bank account because such automatic withdrawals often lead to overdrafts which can subject the consumer to additional bank fees and penalties.
In its recent payday lending rule, the federal Consumer Financial Protection Bureau (CFPB) acknowledged that some wage advance services may not be providing a loan. CFPB states 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 then later reduces the employee’s wage payment by the amount drawn. The strength of the argument is increased when the employer does not reserve any recourse to recover the advance other than through payroll deduction. Unfortunately, the Bureau failed to provide more detailed guidance on how to determine which business models are covered by the lending rules and which are not. For wage advance products that do involve the provision of credit and thus are subject to 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 (NYDFS) recently announced a multistate investigation of allegations of unlawful online lending in the payroll advance industry with a dozen jurisdictions participating. NYDFS says the investigation will focus on whether companies are violating state banking, licensing, payday lending, and other consumer protection laws. The inquiry will look at whether wage advance programs collect usurious or otherwise unlawful interest rates, whether characterized as transaction fees, monthly membership fees, or “tips,” and whether collection practices generate improper overdraft charges for consumers. According to press reports, at least twelve wage advance providers received letters requesting information on their practices. The outcome of this investigation will, we hope, provide much needed clarity on the application of state lending law to the wage advance industry.
State Wage and Hour Issues
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 has to withhold taxes and other deductions, ensure the funds are transferred via a permissible method of wage payment and potentially provide a detailed wage statement. 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.
Some business models have the employee assign some or all of their wages to the provider—a practice which may not be valid in all jurisdictions. Wage assignments are prohibited in some states and regulated to varying degrees in others. In California, for example, an assignment of wages to be earned is valid only if it is to pay for the “necessities of life.” Ohio limits the assignment of future wages to paying court-ordered spousal or child support. If the employee is married, a number of states require the spouse’s consent to the assignment. A provider may characterize the wage advance transaction as a sale of an asset in order to avoid the wage assignment issues. In a number of states, however, such a transaction is deemed to be a loan. In Alaska and Florida, for example, the sale of wages, earned or to be earned, is deemed to be a loan secured by an assignment of the wages and the amount the wages exceed the amount paid is deemed to be interest.
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 assess a transaction 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.
California Considers Legislation to Regulate Wage Advance Providers
Given the uncertainty that surrounds wages-on-demand products under state law, some providers have sponsored legislation that would clarify the law in this area. For example, the California legislature is currently considering a bill, SB 472, which would authorize wage advances by qualified providers who register with the state and meet certain bonding and insurance requirements. Qualified providers could provide advances only on a non-recourse basis, be limited in debt collection activities and prohibited from reporting payment history to credit reporting agencies. The National Consumer Law Center (NCLC) initially said it would support the bill if the scope was limited to authorize only products that are integrated with the employer and to exclude any 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 initiative. The bill is continuing to move forward in the legislature, but its fate is unclear.
The Future for Wage Advance Services
While wage advance services face some serious legal obstacles, the demand for such products amongst workers is high and employers are motivated to provide these services in order to keep their workforces happy. Business lawyers should expect to see significant legal and regulatory developments related to these products in the next year. The outcome of the pending multistate investigations should contribute to a better understanding of which business models are legally viable. Legislative and regulatory activity should also be expected and may significantly impact the service models available in the market.