The fight ahead over earned wage access

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Earned wage access products, which allow workers get an advance on their unpaid wages before payday, are in the legal spotlight — and in the crosshairs — after Maryland regulators weighed in on the key question of whether or not EWA products should be classified as loans. 

The Maryland Office of Financial Regulation issued guidance this month generally aligning with laws passed this year in Nevada and Missouri, establishing that when employers offer an EWA product directly to a worker, it isn't a loan. This is good news for EWA providers like PayActiv and ZayZoon, who are adamant that EWA products aren't loans because the money advanced is for work already performed within a 14-day pay cycle, with no repayment obligation.

But EWA's legal status is far from settled. While Arizona's attorney general last year said that EWA products are not loans, regulators in California are working on EWA rules that lean toward classifying such products as loans, according to the Center for Responsible Lending. 

The latest research from CRL suggests that for consumers who repeatedly pay fees and "tips" for expedited EWA funds through popular third-party EWA service providers like MoneyLion, Earnin and Dave, it amounts to a digital payday loan. In a survey CRL conducted in May among 300 users of direct-to-consumer EWA services, 39% said they feel like they must keep on using these fee-based products to meet ongoing expenses.

"In my view, what California decides about EWA will likely shape how other states approach this issue," said Heather Heebner, vice president of compliance at EWA fintech Instant Financial, which provides a range of instant-payout products for employers, enabling them to advance earned wages at no cost to workers. 

While state laws protect consumers from predatory lending laws, the Government Accountability Office earlier this year recommended that the Consumer Financial Protection Bureau produce guidance clarifying when EWA products are "credit" under the Truth in Lending Act.

Representatives of the payments technology and payroll industries fear that burdening the emerging EWA industry with onerous loan-regulation requirements could chill innovation in the fast-evolving niche.

In recent years, mobile wallets, digital accounts and faster payments technology coalesced to create EWA, giving consumers more control over their day-to-day financial lives, said Brian Tate, president and CEO of the Washington, D.C.-based Innovative Payments Association, which represents a range of fintechs and payments technology providers whose services touch the EWA industry. 

According to Tate, the EWA industry is still in its early stages of development, with competition steadily driving new features to enhance convenience and cost-effectiveness. 

About 13% of employers offer full-time employees earned wage access services, while about 30% are either planning to add an EWA product in the future or still assessing whether it's needed, Sapient Insights Group found in its annual survey of 2,000 global organizations last year.

"EWA services emerged as a valuable tool to aid American workers in managing income volatility, and critics are calling on regulators to restrict consumers' access to EWA because the products are new and don't conform to antiquated views," Tate said. 

PayrollOrg, a nonprofit based in San Antonio, Texas, that represents payroll providers and their concerns, also sees EWA as a positive benefit when offered through payroll companies, as a natural extension of digital payments technology that has steadily streamlined workers' access to their wages.

"Faster-payments initiatives essentially mean that people aren't waiting as long to find out whether their money has cleared, and as a result we now have the technology to pay employees at any time," said Alice Jacobsohn, PayrollOrg's director of government relations. She noted that her organization solely backs employer-sponsored EWA programs.

Payroll administration is typically complex, requiring precise accounting for taxes, child support payments and a myriad of other local and federal factors, which is why the 14-day payroll cycle is common, Jacobsohn said. As a result, most companies don't want to run their payroll every day, but many payroll services providers welcome EWA apps to help workers bridge cash shortages.

On Tuesday, Calgary, Canada-based ZayZoon, which offers an EWA product to small and midsize businesses across the U.S. through payroll providers, introduced an optional platform for employers called Connect, which provides tools to measure employee usage of benefits, including EWA.

With insight into how often employees take EWA payouts, managers could determine when to intervene to offer employees support and financial-health tools, said Tate Hackert, ZayZoon's president and co-founder.

Encouraging EWA providers to promote transparency and frequent communication with EWA recipients is one of the goals of Maryland's financial regulators, said Lisa Lanham, a Philadelphia-based partner at Ballard Spahr who co-leads the law firm's fintech and payment solutions team. 

In addition to clarifying that employer-sponsored EWA products aren't considered loans, and EWA providers aren't required to seek a state license to operate, Maryland's regulators said that third-party EWA providers must steer clear of situations to avoid having their services classified as loans, Lanham said.

Any EWA provider that absorbs the loss when employees default on EWA advances could be considered lenders, according to Maryland's recent guidance. And EWA providers that have little or no contact with employees, or profit from tips or fees in exchange for providing these services, might risk being classified as lenders by Maryland's regulator, according to Lanham.

"Some third-party EWA providers may go ahead and offer a new product in Maryland without knowing where the lines are, and they may run the risk of encountering enforcement action," Lanham said.