Employees increasingly are able to access earned pay on their demand, between pay cycles, when their employees work with on-demand pay (also known as earned wage access, or EWA) providers. Today, with inflation at a 40-year high, surging consumer prices have expedited the utility of EWA, especially for hourly workers.
Since 2020, research into the use and benefit of on-demand pay for employees has expanded, with results showing just how much the benefit is helping workers avoid payday loans and overdraft payments, for example. On the employer side, recent studies also affirm that providing on-demand pay reduces turnover and increases applicant flow across industries.
This more detailed and empirical analysis is helping to drive efforts on the federal and state level to clarify and provide oversight into this fast-growing payments area.
There has been legislative activity on this issue in several states, and while so far no new laws specifically addressing the on-demand pay/EWA industry have passed, there also have been regulatory agency initiatives–very narrow in nature–that seek to explore and define the landscape of offerings.
Overall, these pursuits signal there is increasing recognition that providing employees an on-demand pay option is a bona-fide beneficial business practice, even though the provisions governing will continue to be hashed out. This is happening on several levels.
A recent Biden Administration proposal, included in the 2023 budget-explaining Green Book, is one example of how an executive agency is beginning to define the nature of on-demand pay–at least from a tax perspective. While in the formative stage and unlikely to become effective anytime soon, this policy direction is a positive development. It shows that the Treasury Department is expected to work with stakeholders in the near future to come up with parameters that minimally impact employers while ensuring employment taxes are deposited timely in an on-demand pay environment. And the proposal reinforces the position that the service is not credit.
State initiatives, such as the memorandum of understanding effort in California that has involved several EWA and other entities, are mostly short-term oversight procedures that serve to provide mainly consumer protection guardrails until a more formal regulatory regime is set up. That more formal regime was proposed earlier this year, and may be revised or finalized in the coming months.
Opinions, which we feel include the late-2020 Consumer Financial Protection Bureau advisory and temporary sandbox approval order, as well as a recent California DFPI opinion, have also been helpful again to signal that on-demand pay processes are becoming more common and mainstream.
But these issuances address varying fact patterns and generally are not broad judgments or rulings that apply to all providers–only to the ones seeking the opinion–and are very limited to the facts and circumstances presented by the requesting provider. Any language that provides clarity for one particular process or model in these assessments is specific to the one request–not to the exclusion of any other provider processes.
Overall, as on-demand pay/EWA becomes more and more popular for employers and employees, smart regulatory oversight approaches must recognize there are distinct and fast-evolving business models in the field of enterprise on-demand pay.
The effort to give regulators and legislators the ability to clarify legitimate approaches to on-demand pay and identify deceptive and unfair business practices is necessary. At the same time, however, arbitrary and cumbersome requirements should be avoided, as they will limit innovation, and the overall benefit to the employer and employee communities.
