How to stay compliant with your pay-as-you-go program
It’s a market for job seekers. Unemployment is at its lowest level since the start of the pandemic and workers are not showing great urgency to fill vacancies. Employers need an edge.
Here is pay on demand. Employees no longer have to wait two weeks or a month to get paid. They can access their money as soon as they earn it.
Companies wishing to offer this benefit should be aware of federal and state laws applicable to payday loan and payday advance programs, including the limitations and durability of the advisory opinion provided by the Consumer Finance Protection Bureau (CFPB) . These rules and guidelines deal with fees, wage recovery and remedies, required disclosures, etc. Knowing them is vital.
Learn more: How pay-as-you-go improves employee well-being
Why pay-as-you-go is important
Workers have been under incredible stress over the past 18 months as the pandemic has turned lives upside down. Almost everyone was affected directly or indirectly. Pay-as-you-go is one way to ease the financial stress of the economic turmoil caused by the pandemic.
According to a survey conducted by Bank of America 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 were essential to their financial security.
People want payment on demand
A recent study of more than 1,000 workers by HR software company Ceridian found that people at all income levels want to get paid immediately.
More than three-quarters of respondents said they would be more loyal to an employer if they offered free and immediate access to their earnings. Additionally, 81% said they would be more likely to work for a company that provided free access to earned income than an employer that did not.
Due to the growing demand for the service, a host of companies are offering some type of earned wage access. As service and costs increase, the likelihood of increased regulation, licensing and oversight will also increase. On October 12, 2021, a coalition of 96 consumer, labor, civil rights, legal, religious, community and financial and academic organizations wrote a letter to the Consumer Financial Protection Bureau (CFPB) urging it to revoke or revise significantly two measures taken at the end of 2020 regarding Earned Wage Access (EWA) products. The group believed that the CFPB’s advisory opinion declaring that certain EWA programs were not “credited” under the Truth in Lending Act and subject to Regulation Z threatened to create loopholes in federal credit and fair loans. They also believed it could be misused to promote fintech exemptions in state payday loan law.
If not carefully managed, access to earned wages can become another form of payday lending. California was the first state to address industry regulation before the bill blocked in the legislature end of 2020.
New Jersey, New York, South Carolina, Georgia, Utah, Nevada, and North Carolina have also attempted to regulate EWAs. Utah’s legislation also stalled in the legislature. The American Payroll Association’s Government Relations Task Force Subcommittee on State and Local Matters Supports Nevada and South Carolina Bills That Would Allow Employers to Offer Employee Workplace Programs access to earned wages (EWA). Both bills require licenses and disclosures.
The New Jersey State Assembly focused on employer-sponsored programs used solely as employee benefits. Its senate has yet to take up the measure, but an accompanying bill is pending. Other states have adopted approaches like New Jersey’s, and it can be expected that more states will adopt similar legislation as the popularity of EWAs continues to grow.
The Consumer Financial Protection Bureau first looked into the matter in December 2020 when it issued a newsletter provide an advisory opinion on whether EWAs are credit extensions under The Truth in Lending Act and its Regulations Z.
According to American Bar Associationrule Z applies when:
- Credit is offered or extended to consumers
- The offer or granting of credit is carried out regularly
- The credit is subject to finance charges or is payable by written agreement in more than four installments
- Credit is primarily for personal, family or household purposes
To not be considered a Reg Z loan, the EWA must meet the following requirements:
- Be employer-based
- Cannot exceed the amount of wages earned but not paid
- Salaries must be free, although the CFPB has indicated that a “nominal processing fee” is authorized without specifying
- Payroll deduction is the only way to recover anticipated wages
- If a payroll deduction fails, the company has no legal recourse against an employee
- Users must receive clear information
- No credit checks are allowed
What to look for in a compliant supplier
It doesn’t matter if you are an HR technology platform or an employer; there are important considerations to make before implementing a pay-as-you-go program. You need to determine if:
- Provider charges interest, fees, or other finance charges for earned payday advance or to access funds
- The activity is subject to state and federal regulation and supervision
Consult with your legal team to confirm that the pay-as-you-go provider is following all of the above to ensure long-term compliance.
Pay-as-you-go is quickly becoming the “must have” benefit. The only way to ensure that this benefits you and your employees is to carefully vet the supplier to ensure they comply with all relevant regulations. Knowing what to look for will help you stay on the safe side of the rules.