Employees increasingly have the ability to access earned wages as needed between pay cycles when their employees work with on-demand payroll providers (also known as Earned Wage Access, or EWA). Today, with inflation of a 40 year highrising consumer prices have accelerated the benefits of EWA, particularly for hourly workers.
Since 2020, research into the use and benefits of on-demand pay for workers has expanded, with results showing just how much the benefit helps workers avoid things like payday loans and overdrafts. On the employer side, recent studies also confirm that the provision of pay on demand reduces turnover and increases the flow of applicants in all industries.
This more detailed and empirical analysis helps advance federal and state efforts to clarify and oversee this fast-growing area of payments.
Legislative activity on this issue has been undertaken in several states, and while no new legislation has yet been passed that specifically addresses the on-demand payments/EWA industry, there have also been initiatives from regulators – very narrow in nature – which aim to examine and define the supply landscape.
Taken together, these efforts signal a growing recognition that providing employees with an on-demand pay option is a bona fide, beneficial business practice, albeit as applicable regulations continue to be developed. This happens on several levels.
A recent proposal by the Biden administration to be included in the Green Book explaining the 2023 budget is an example of how an executive agency is beginning to define the nature of pay-on-demand — at least from a tax standpoint. While this policy direction is still in its infancy and is unlikely to take effect in the foreseeable future, it is a positive development. It shows that the Treasury is expected to work with stakeholders in the near future to develop parameters that minimally impact employers while ensuring payroll taxes are filed in a timely manner in a means-tested pay environment. And the proposal reinforces the position that the service is not credit.
Government initiatives, such as the MoU in California, involving several EWAs and other entities, are mostly short-term oversight processes designed primarily to provide consumer protection guardrails until a more formal regulatory regime is in place. This more formal rule was proposed earlier this year and could be revised or finalized in the coming months.
Opinions, which we believe include the Consumer Financial Protection Bureau’s late 2020 recommendation and temporary sandbox approval order, as well as a recent California DFPI statement, were also helpful in signaling that on-demand payment processes are becoming more common and go mainstream.
But these publications relate to different sets of facts and are generally not general judgments or decisions applicable to all providers – only those seeking the opinion – and are very limited to the facts and circumstances presented by the requesting provider. Any phrasing that provides clarity for a particular process or model in these reviews is specific to the one request – not to the exclusion of other vendor processes.
As pay-as-you-go/EWA gains popularity among employers and employees, intelligent regulatory approaches need to recognize that there are diverse and rapidly evolving business models in the area of pay-as-you-go for companies.
There is a need to enable regulators and legislators to clarify legitimate pay-on-demand practices and identify fraudulent and unfair business practices. At the same time, however, arbitrary and cumbersome requirements should be avoided as they limit innovation and overall benefits to the employer and employee communities.