There has been a lot of talk about on-demand payroll (often referred to as earned wage access), as its popularity has exploded in recent years. 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 demand by large and small employers nationwide .
It helps workers avoid payday loans, high bank overdraft fees, and other low-cost or no-fee sub-optimal financial alternatives. It reduces their financial stress and, as such, tends to make employees happier who stay longer. Advertising a daily salary benefit also significantly increases the pool of candidates in industries with high turnover. And with employers needing all the incentives to attract workers after the pandemic, it’s no surprise that pay-on-demand is the fastest growing benefit category, fueled by a new generation of workers. fintech companies innovating on archaic payroll systems.
With more companies joining the fray and increased competition in the space, not to mention on-the-fly imitators looking to shorten every system, discussions are ongoing about how to maintain compliance while applying these programs. How should they be exploited? Who should pay what? What guarantees for consumers should be put in place? And more.
We now have a good story, with 8 states experimenting with space legislation to date. The federal government has also provided partial advice, and California has moved to a flexible approach led by regulators rather than pursuing legislation.
With all of this experience, we are able to infer some common themes of “smart” regulation, so that as this industry matures, the best outcomes for consumers can be achieved. The following principles, policies and concepts inform a leading regulatory approach to access to earned wages.
1. Must be limited to take-home pay or “take out”: According to a key regulatory analysis, being able to limit the funds available to a true “take out” or “net” salary is fundamental so that all access to an earned salary is not a credit transaction. Much like access to equity in a life insurance policy, wages earned are fundamentally the property of the worker, and without employer data or other reliable mechanism to confirm the amount of accumulated wages, adjusted for them. taxes, payroll deductions and the like, you can’t even claim to offer access to “earned” wages, since you don’t know what is earned and what is not.
2. Payroll integration avoids accidental overdrafts and general stress: Pay-on-demand technology was invented to help workers avoid overdrafts and payday loans. Most major vendors integrate directly with employer payroll systems, so the flow of earned salary payments is smooth. Without payroll integration, however, some businesses debit consumers’ bank accounts for reimbursement. This means that the software controls when to debit user accounts, and when this technology does not work as expected (which unfortunately regularly does), lucky workers end up having Following discovered to pay, instead of hiring a service they thought could help them to avoid discovered! A company just paid $ 12.5 million to settle such claims, and the practice should absoutely be avoided. Debiting a bank account directly and regularly for cash provided is indicative of a credit transaction, so the debit should be further disadvantaged for regulatory reasons. Likewise, offering money through general public solicitation and then being reimbursed by direct debit, rather than the service being limited to a verified work environment, is not indicative of earned income. salary access relationship.
3. Without recourse: Another key consumer protection is to ensure that pay-on-demand transactions are non-recourse for the worker. This means you can’t sue the worker if the employer doesn’t do the payroll or gives you bad data, and you can’t report employees to collection or credit reporting agencies.
4. Registration and regular reports: With the proliferation of fintech, states are increasingly adopting flexible regulatory approaches that mimic a “light registration” regime. With state registration and regular reporting, states can ensure that only known actors engage in this new space and get regular information from them without undue compliance burdens or excessive red tape.
5. Liability for complaints: In addition to registration, regular reporting, and the other consumer protections mentioned above, regulators should know if one supplier (or group of suppliers) faces significantly more consumer complaints than others. These could be indications of deceptive marketing practices, regular technology malfunctions, or issues requiring further investigation.
6. Transparency of fees: Any regulatory regime should also require that all the fees are clearly displayed to consumers so that they can properly assess their financial options.
7. No gadgets: Due to the labyrinthine rules around credit, some companies have come up with confusing pricing models in an attempt to bypass regulatory challenges or to make customers feel like the service is free. With a clear registration and liability regime, pricing tricks are no longer necessary and, when combined with fee transparency, should further protect consumers.
8. No individual subscription: Every worker should have access to pay-on-demand technology, regardless of skin color, gender, personal financial history, or other demographic information. The Consumer Financial Protection Bureau (CFPB) guidelines referred to this requirement as there is no individual subscription, but there should also be no discrimination of users based on information about them.
With these principles in mind, we can jointly build an agile, flexible and intelligent regulatory regime for promising emerging technology while protecting consumers at the same time.
