There has been much discussion of on-demand payroll (often called earned wage access) as it has exploded in popularity in recent years. The technology, which allows employers to “virtualize” the payroll process, and run payroll as often as daily without disrupting their payroll and accounting systems, is in serious demand by large and small employers nationwide.
It helps workers avoid payday loans, hefty bank overdraft fees, and other suboptimal financial alternatives at low or no cost. It reduces their financial stress, and as such tends to result in happier employees that stay longer. Advertising a daily pay benefit also typically materially increases the applicant pool in high turnover industries. And with employers needing every incentive to lure workers back post-pandemic, it’s no surprise that on-demand payroll is the fastest growing employee benefit category, powered by a new breed of financial technology companies that are innovating on archaic payroll systems.
With more and more companies joining the fray, and more competition in the space, not to mention fly-by-night copycats looking to shortcut every system, there is ongoing discussion regarding how to maintain compliance while operating these programs. How should they be operated? Who should pay for what? What consumer safeguards should be in place? And more.
We now have some good history, with 8 states experimenting with legislation to date on the space. The Federal Government has also weighed in with partial guidance, and California has moved to a flexible regulator-led approach rather than pursue further legislation.
With all this experience, we are able to deduce some common themes of “smart” regulation, so that as this industry matures the best outcomes for consumers can be obtained. The following principles, policies and concepts inform a best-in-class regulatory approach to earned wage access.
1. Must Be Limited to Net or “Takehome” Pay: According to key regulatory analysis, being able to limit funds available to true “take home” or “net” pay is fundamental to any earned wage access not being a credit transaction. Much like accessing a life insurance policy’s equity, earned wages are fundamentally property of the worker, and without employer data or other reliable mechanism to confirm amount of pay accrued, as adjusted for taxes, withholdings and the like, you are unable to even claim to offer “earned” wage access, since you don’t know what is earned vs unearned.
2. Payroll Integration Avoids Accidental Overdrafts and General Solicitation: On-demand pay technology was invented to help workers avoid overdrafts and payday loans. Most leading providers integrate directly with employer payroll systems so the stream of earned wage payments is seamless. Without payroll integration, however, some companies debit consumer bank accounts to get repaid. This means that software is controlling when to debit users' accounts, and when that technology does not operate as expected (which unfortunately is regularly the case), workers hard on their luck end up having more overdrafts to pay, instead of engaging a service they thought would help them avoid overdrafts! One company just paid $12.5 million to settle such claims, and this practice should definitely be avoided. Debiting a bank account directly and regularly for money provided is indicative of a credit transaction, so debiting should be even further disfavored on regulatory grounds. Similarly, offering money via general solicitation to the public then getting repaid by direct debiting, rather than the service being limited to a verified, work-based environment, is not indicative of an earned wage access relationship.
3. Non-recourse: Another key consumer protection is ensuring on-demand pay transactions are non-recourse to the worker. This means you can’t pursue the worker if the employer doesn’t make payroll or gives you bad data, and you can’t report employees to collections or credit reporting agencies.
4. Registration and Regular Reporting: With proliferation of financial technology, states are increasingly pursuing flexible regulatory approaches that mimic a “registration light” regime. With state registration and regular reporting, states can ensure that only known actors are engaging in this new space, and obtain regular information from them without undue compliance burdens or excessive red tape.
5. Complaints Accountability: Along with registration, regular reporting, and the other consumer protections mentioned above, regulators should have a pulse on whether one provider (or group of providers) are running into many more consumer complaints than others. These can be indicia of deceptive business practices, regularly malfunctioning technology or matters that require further scrutiny.
6. Fee Transparency: Any regulatory regime should also require that all fees are clearly displayed to consumers so they can properly evaluate their financial options.
7. No Gimmicks: Because of labyrinthine rules regarding credit, some companies have come up with confusing pricing models to either attempt to circumvent regulatory challenges, or give customers the impression the service is free. With a clear regime for registration and accountability, pricing gimmicks are no longer necessary and, when combined with fee transparency, should further protect consumers.
8. No Individual Underwriting: Every worker should get access to on-demand pay technology regardless of their skin color, gender, personal financial history or other demographic information. Consumer Financial Protection Bureau (CFPB) guidance has referred to this requirement as there being no individual underwriting, but there should also be no discrimination of users based on any information about them.
With these principles in mind, we can jointly achieve a nimble, flexible and smart regulatory regime for a promising emerging technology while protecting consumers at the same time.
