Offer access to earned wages in accordance with the CFPB to your employees
The Consumer Financial Protection Bureau released two groundbreaking opinions at the end of the year, both involving access to earned wages. These releases have provided regulatory certainty for one specific vendor while potentially increasing regulatory uncertainty for others.
CFPB Advisory opinion provides the following compliance criteria for an EWA provider to be exempt from the Truth in Lending Act so that the EWA product is not considered a loan.
The criteria are:
- The EWA program must be employer based.
- EWA amounts cannot exceed the amount of wages earned but not paid.
- EWA must be free, but a “nominal processing fee” may be allowed.
- The recovery of EWA amounts can only be done by deduction from wages.
- No legal recourse against an employee for failure of withholding.
- Clear disclosures to users.
- No credit check.
This means that, in order not to be considered credit under the notice, an EWA provider must offer access to earned wages as a sponsored benefit through an employer. Models or direct-to-consumer providers who ask users for “tips” are not covered by the Notice.
Another critical criterion is that the The EWA provider can only recover amounts that employees access through payroll deductions. The CFPB bases its logic by stating that it “believes that a covered EWA program facilitates the access of employees to the wages they have already earned and to which they are already entitled, and therefore functionally functions as an employer who pays its employees. earlier than expected. payday.
Read more: Is early access to salary a benefit or just another loan?
This criterion necessarily excludes EWA providers who use interim accounts; in particular suppliers who require users to deposit their entire salary into an intermediary account controlled by the supplier and located between the employer and the worker.
Thus, these providers risk being viewed as a lender who must comply with federal and state loan laws. This intermediary account model could also trigger salary assignment laws and allow employees to access their full salary, leaving nothing or even a negative balance on payday.
Following the advisory opinion, the CFPB issued aOrder of approvalexpressly stating that a vendor’s EWA program is exempt from the aforementioned lending laws as (a) it is not a debt, (b) it only charges a nominal fee, (c ) that it is based on payroll without recourse against the employee, (d) does not engage in underwriting and (e) only makes it easier for employees to access wages they have already earned.
At present, no other supplier has such a CFPB approval order.
While states have their own set of rules, they often turn to the CFPB for advice. The New Jersey Assembly, for example, has just passed the very first law expressly recognizing access to wages earned by unanimous consent. This unanimous, bipartisan endorsement demonstrates that state legislators also see the value of EWA.
Overall, this regulatory clarity is great news for employers and workers. The federal consumer financial watchdog has officially recognized that EWA is not only a new financial product, but also “an innovative way for employees to meet the short-term cash needs that arise between paychecks. without turning to more expensive alternatives like traditional payday loans “.