How Does the CFPB’s Earned Wage Access Guidance Impact Payroll?

  • Understanding on-demand pay/earned wage access for payroll purposes 
  • Why are employers and employees seeking this payment option?
  • New guidance distinguishes on-demand pay from loans
  • What does this have to do with payroll compliance?

Have you, in your role in payroll, been involved in some way in earned wage access (EWA) or on-demand pay? 

These are not advances in pay in the sense that we are used to, say, when an employee asks for and gets an advance on next week’s pay but has not worked the week yet. That’s an advance. 

I’m talking about access, on demand, to amounts already earned. That’s what an ever-growing number of third-party providers are claiming they do. They work with employers to get payroll data for employees to determine amounts accrued for working. This includes daily or even hourly feeds of timekeeping information and, for the most sophisticated programs, algorithms that can calculate prorated net pay.

Why Is On-Demand Pay/EWA Growing?

Employers are attracted to offering some sort of on-demand pay because of increases seen in retention, engagement and the ability to recruit workers. With reliance on accurate time accruals to determine amounts available, colleagues have told me they have noticed far fewer timeclock discrepancies. People are more conscientious about clocking in and out. Some of these third-party programs add tasks for payroll though, while some don’t.

Hourly workers, and those who live paycheck-to-paycheck, see a lot of benefit in being able to draw on their pay before payday to pay bills or to deal with unexpected expenses. Salaried workers also are benefiting from earned wage access tools.

Most of these programs generally are not considered loans or credit, but I’ve been told to beware of some of these outfits because they really are online payday loan operations, or they employ a lot of payday loan-like processes, especially to get their money back.

New Guidance Addresses Loan/Not Loan Question

At the end of 2020, the Consumer Financial Protection Bureau (CFPB) started to address this situation, releasing first an advisory opinion and, second, a temporary approval order for one of the providers allowing them to continue to operate not as a loan operation so long as they follow some strict guidelines. They will be reassessed in two years.

The CFPB EWA order could have gone one of two ways. The Bureau could have said their approach is credit, and then the outfit would have been considered a loan operator that has to meet all kinds of requirements under the consumer codes, and they would have to stop operating in several states (a number of states outlaw payday loan operations). But, the CFPB said this one approach to on-demand pay is excluded from being considered a credit or loan program for at least the next two years.

It was all about whether a particular on-demand pay company’s offering was considered credit. 

The order does not rule on the status of other third-party providers, instead speaking to their potential issues indirectly, laying out how other earned wage access provider programs also are not likely loan operations. That’s where the story ends here with this guidance.

Payroll Compliance and Burden

But for payroll, the story really ends with ensuring not whether some vehicle for providing earned wage access is a loan, but with protecting the employer from undue compliance exposure and burdensome, expensive processes when offering such programs.

Face it, just about all third-party providers of anything involving payroll say they are fully compliant. We all have to look into those claims. The issue the CFPB addressed had literally nothing to do with payroll compliance. 

In fact, wage deductions were the provider’s proposed repayment method in the CFPB application, but wage deductions as a way to repay amounts under an earned wage access program remain illegal in several states. 

Other on-demand pay providers do not use wage deductions to recoup on-demand amounts. 

As such, these providers don’t believe there is a need at this time to request a determination from the CFPB.

This is why we’ll see some on-demand pay providers scrambling to get the CFPB to state their particular programs are not credit, and others that are more secure in their particular existing on-demand pay solution, do not see that need.

Whatever the solution you are presented with, know that CFPB approval of an approach will not address the payroll angle on the employer’s side, so please remember to vet for payroll compliance and additional burden. PYD

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