4 things you need to know about on-demand pay compliance

The regulations around on-demand pay providers are continually evolving to keep pace with an industry growing at a meteoric rate. In the post-pandemic economy, there is a surplus of jobs and a limited number of workers. Because of this, we are seeing organizations offer more benefits, such as on-demand pay, to entice workers. However, these organizations also need to be aware of how best to stay compliant — this includes being on top of changing state and local laws, as well as federal regulations, around on-demand pay.

On-demand pay Is a 2021 must-have

The economy is heating up, but the talent market is tight, so the company with the best pay and benefits will win. We know that 60% of employees would take a job if they had more flexibility to select pay frequency, same-day pay, or early access to pay, so it’s clear that flexible pay options are a must-have.

American workers need access to their money. The reality of today’s workforce is that workers are living paycheck to paycheck, or worse — payday loan to payday loan — and the pandemic has not improved matters. According to MarketWatch, 38% of Americans would have to sell something or take out a loan if they needed even $500 in cash.

On top of that, nearly 25% of all Americans had no emergency savings,16% have taken on more debt, and nearly 33% of households reported lower income since the start of the pandemic, a separate report by Bankrate.com concluded.

An ideal solution is on-demand pay. Employee financial wellness has become a top priority for organizations. They feel employees deserve access to the wages they’ve already earned. Not only is it the right thing to do, but these companies are seeing a 34% reduction in absenteeism, a 40% reduction in turnover, and an 86% increase in job performance.

State regulations for on-demand pay are ever-changing

As on-demand pay or earned wage access becomes more popular, states are stepping in to ensure that earned wage access is truly a benefit to workers. California was first with an onerous law that eventually failed. New Jersey followed by trying to enact a similarly detailed law, but that too failed. Both states have since implemented looser laws.

There are currently eight states experimenting with legislation, including New Jersey, New York, North and South Carolina, Georgia, Utah, Nevada, and California. It’s important to understand that some, but not all, on-demand pay programs are subject to changing state laws.

Organizations with state-regulated on-demand pay programs must stay on top of new and changing state legislation. The good news is that, for the most part, this various legislation differentiates between employer-based on-demand pay, and consumer-direct wage advance programs, which have their own regulatory considerations.

The federal government has regulations too

The United States government has been watching the evolving innovation in on-demand pay. In December of 2020, the Consumer Financial Protection Bureau came out with a bulletin advising that on-demand pay providers that offer on-demand pay and meet certain standards aren’t considered credit and aren’t subject to the stringent requirements for loans under Regulation Z (the Truth in Lending Act).

However, to qualify, they have to meet certain requirements, including:

• The on-demand pay provider must provide funds to an account of the employee’s choice
• The on-demand pay provider cannot charge fees for opening an account, delivery of funds, or use fees
• Any prepaid card associated with the account must be issued on a major brand network and available for use at multiple merchants
• There must be a free and reasonably accessible means to obtain cash from the account

Before anyone implements an on-demand pay solution, they must clearly explain to the employee that they:

• Will not require the employee to pay any fees in connection with their account
• Will not charge any overdraft fees
• Will not engage in any debt collection activities
• Will not directly or indirectly assess the credit risk of individual employees by reviewing credit reports or credit scores

How to ensure on-demand pay solutions are compliant

Whether you’re an HR tech provider or an employer, before implementing an on-demand pay program, here is a summary of things you should look for in an on-demand pay provider:

• Ensure the on-demand pay provider does not charge employees fees for wage advances
• Ensure the on-demand pay provider is backed by a federally regulated (subject to federal regulations), not state-regulated (subject to changing state regulations), brand network
• Ensure the on-demand pay provider uses a major brand network with access to multiple merchants and accessible (feeless) ways to get cash from the account
• In addition, you should always check with a legal team to ensure that the on-demand pay provider follows all regulations.

On-demand pay is a next-level benefit where everyone wins. However, the on-demand pay provider must be thoroughly vetted to ensure compliance with federal and state laws.

Understanding what to look for in an on-demand pay provider is important for compliance with today’s ever-changing legislation.

Ron DiGiacomo is the Chief Compliance Officer for Clair and an expert in financial regulation. He is the former COO of consumer banking at JP Morgan Chase and deputy chief compliance officer for Wells Fargo.