Employer warning: prepayment products

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A hot topic of discussion in payroll offices across the country is the prospect of new services that will give workers instant access to their wages for the hours worked, but which will only be paid after the current payroll cycle has ended. These services, also known as ‘prepaid wages’, ‘earned wage access’ or ‘wages-on-demand’ products, are becoming increasingly popular with workers, especially those working for the minimum wage. Employers who offer the programs often see increases in employee morale and retention. However, these programs raise a number of tricky legal issues. Depending on the structure, a program can violate lending law or wage and working time regulations. Several states are investigating whether certain advance wage providers are violating state laws. Companies considering offering upfront wages to their employees should carefully review programs for regulatory compliance.

On-demand wages fall into two broad categories. There is a direct-to-consumer model in which the employee provides the provider directly with wage history and other information and authorizes the repayment of the advance from the employee’s bank account. Employers do not participate in products aimed directly at the consumer and the advance is funded by the provider. Other wage payment programs, on the other hand, integrate with the employer, who then markets the service to his employees and shares information about the hours worked with the provider. The employer can finance the advance payment and support it by deducting wages. Employees who use both services usually pay a per-transaction fee or a monthly participation fee. Some providers do not charge any fees, but ask users for “tips”. There are a number of variations on these models, making these services difficult to generalize. Employers should review the details of a particular program before committing and assess whether the proposed program complies with lending laws and state wage and working time laws.

Compliance with federal and state credit law

A fundamental question about pay-on-demand products is whether the advances granted are loans that are subject to federal or state lending laws. Critics of the sick pay programs see them as an updated form of payday loans. However, the Federal Consumer Financial Protection Bureau (CFPB) has recognized that some wage advances do not involve lending and are therefore not covered by its Payday Loan regulation. Unfortunately, the Bureau has failed to provide detailed guidance on how to determine which business models will trigger the rules and which will not. For those continued wage products that fall under the regulation, the CFPB has created exemptions for services that meet certain requirements.

Even if a certain advance wage payment is not a lender under federal regulations, it may still be subject to regulation at the state level. The New York Ministry of Finance recently announced a cross-state investigation into allegations of illegal online lending in the payroll industry that involves a dozen jurisdictions. The focus of the investigation seems to be on direct consumption products and whether these charge illegal interest rates, disguise fees as “spikes” and violate licensing and banking laws.

Compliance with the state wage and working time law

On-demand wages must also comply with state wage and working time laws. A central question is whether a payment for hours worked, for which the wage will only be due in the future, should be classified as continued wage payment or wage advance. If it is a wage payment, the employer will likely need to provide a detailed wage statement, withhold taxes and other deductions, and ensure funds are transferred using an approved wage payment method. If, on the other hand, payment is made as a wage advance, the employer must comply with the wage advance and wage deduction regulations. For example, in New York, a prepayment that fixes interest or charges a fee is not considered a “wage advance” and cannot be reclaimed through wage deduction.

Employers offering payroll cards to their employees should ensure that the advance pay product they choose is compatible with their card program. A number of states prohibit the payment of wages on a payroll card, which charges a fee for charging wages to the account. In these jurisdictions, prepaid wage products that impose a fee can be problematic. Other states prohibit the association of payroll cards with any form of credit, “including a loan for future payment or a cash advance on future payment”. Employers choosing a prepayment product should be careful not to cause problems for employees who choose to pay by payroll card.

The future of the pay-on-demand product

Given the uncertainty surrounding pay-on-demand products under state law, we expect legislative activity in this area in the near future. Only one state is currently considering a draft wage advance product bill. California SB 472 would approve wage advances from qualified providers who meet certain requirements. The National Consumer Law Center (NCLC) originally said it would support the law if amended to only authorize products that are integrated with the employer and ban products that directly debit a consumer’s account. NCLC also advocated stricter fee limits and usage restrictions. The legislation was changed in the committee, but not in the way NCLC wanted, and the organization is now opposed to the move. As the bill progresses through the legislature, its fate remains unclear.

Prepaid wage products are becoming increasingly popular with workers and employers will be under pressure to provide the service.

Copyright © 2021 Womble Bond Dickinson (US) LLP All rights reserved.National Law Review, Volume IX, Number 220

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