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Free isn’t always free
Don’t you love when you get something for free? It’s an adrenaline rush that fills you with pride and makes you feel like you’ve beaten the system and won the game. The word “free” is a powerful marketing tool designed to make you take notice.
Often though, we find out that free isn’t always free. Like the free ticket that requires the purchase of a full-price ticket, the free trial of the mobile app doesn’t have the cool features we wanted, or the free event comes with $10 parking fees and $20 beers.
Everyone has a story about when they fell for the “free.” We learn not to succumb to the short-term shiny benefit and to do our homework. To look under the covers and evaluate the free offer’s short- and long-term consequences.
Free-to-card Earned Wage Access vendors market their service as “no fee” or “free” to use. They emphasize that their model has “no costs” to the employer or employee.
However, as we explain below, free doesn’t mean zero fees, and free doesn’t mean free of regulatory compliance issues.
What is Earned Wage Access (EWA)?
Earned Wage Access (EWA), also called on-demand pay, is a voluntary financial wellness benefit. It allows employees to access a portion of their net earned and accrued wages, when needed, between pay cycles.
What is Free-To-Card EWA?
Free-to-card EWA vendors claim they do not charge a fee to transfer EWA funds to the employee. Instead, they generate revenue by mandating the employee use the vendor’s payroll card or digital wallet to receive the EWA funds. In some cases, free-to-card EWA vendors also require that the employer transfer all payroll deposits to the EWA vendor’s bank account (for those employees who have made EWA transfers). The EWA vendor then debits the EWA transfers and fees and deposits the remaining payroll into the employee’s named account.
The free-to-card EWA vendor makes money from the interchange fees incurred from card usage and other fees assessed, including transferring the funds to another card account.
Seven criteria to evaluate free-to-card EWA models
Free-to-card EWA doesn’t mean zero fees or free from regulatory compliance issues. When evaluating a free-to-card EWA model, consider these seven criteria:
1. Regulatory guidance on EWA and TILA
2. Accrued value of earned wages
3. Regulatory compliance regarding loans and money transmission
4. Total fees such as approval, maintenance, transfer, and use fees
5. Single account mandates and direct deposit control
6. Legal responsibility for third-party direct deposit
7. Federal and State payroll card regulations
1. Regulatory guidance on EWA and TILA
At first glance, free-to-card EWA models may appear to comply with regulatory guidance regarding EWA vendors and the Truth in Lending Act (TILA).
The Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion on EWA in late 2020.[1] The CFPB clarified that “Covered EWA Transactions are not ‘credit’” and, therefore, not subject to Regulation Z and the Truth in Lending Act (TILA).
To qualify as a “Covered EWA Provider,” an EWA vendor must meet the CFBP’s seven characteristics. The third characteristic the CFPB provided in their EWA advisory opinion dealt with the fee associated with the EWA transaction. Item (3) states:
“(3)The employee makes no payment, voluntary or otherwise, to access EWA funds or otherwise use the Covered EWA Program, and the Provider or its agents do not solicit or accept tips or any other payments from the employee.” [2]
Vendors offering a free-to-card EWA solution follow this one aspect of a Covered EWA Program: they are not charging a fee to allow access to the employee’s EWA funds.
However, to qualify as a Covered EWA Program and not be designated as providing credit, the EWA Vendor must meet ALL SEVEN criteria, not simply the one regarding fees:
1. The contract for EWA services is with the employer, not the employee
2. The EWA transfer amount does not exceed the accrued value of earned wages based on data provided by the employer
3. The employee does not have to pay to use the EWA benefit or access funds, and the funds are delivered to an account of the employee’s choosing
4. EWA funds recovery is only via a payroll deduction
5. The EWA vendor does not claim remedy for non-recovery of funds
6. The employee is notified of the contract for access to the EWA program and funds
7. The EWA vendor does not do a credit check on the employee
So, if the free-to-card EWA vendor does not meet all seven criteria, they could be considered a creditor providing a loan.
As a credit instrument, offering these products on a prepaid card platform is illegal in many states. The CFPB Prepaid Rule[3] imposes specific requirements and terms for a credit instrument to be attached to a payroll card (or any alternate payment method such as a digital wallet).
2. Accrued value of earned wages
As listed in item (2) above, to be considered a “Covered EWA Program” free from TILA regulations, the EWA transfer amount cannot exceed the accrued value of earned wages based on data provided by the employer.
Make sure that the free-to-card EWA vendor isn’t guessing the amount of earned wages available for transfer. For example, some vendor use “earnings history” or “artificial intelligence algorithms” to guestimate accrued wages.
3. Regulatory compliance regarding loans and money transmission
If the free-to-card EWA vendor is not a “Covered EWA Provider” as designated by the CFPB, the transfer of funds to the employee is considered a loan and subject to TILA regulations.
Additionally, depending on how the transfer of money is being made by the provider to an employee, the third-party vendor could fall under state-regulated money transmitter regulations.
Failure to register as a Money Service Business could result in a $5,000 fine for each violation and up to 5 years in jail.[4] Not a good look for your company’s financial wellness benefits program.
4. Total fees such as approval, maintenance, transfer, and use fees
The big issue regulators are concerned with is the total cost an employee pays to receive and use their EWA funds. When adding up the total cost, consider approval, maintenance, and use fees, such as:
>> Implementation fees – fees applied to the employee to use the EWA services
>> Immediate access fees – fees employees pay to get money instantly or immediately instead of waiting one or two days
>> Intermediate transfer fees – fees employees pay to transfer funds from the vendor account or card to the employee’s account of choice
>> Intermediate outside-of-time-bounds fees – fees the employee pays to transfer funds outside “once per week” bounds
>> Use fees – fees applied to an employee to get cash from the payroll card or digital wallet, or fees to use an ATM to get cash
When you add up all the fees, is the total amount reasonable for EWA funds accessed, or does the free-to-card EWA model feel more like a payday loan?
5. Single account mandates and direct deposit control
In some cases, free-to-card EWA vendors also require that the employer transfer all payroll deposits to the EWA vendor’s bank account (for those employees who have made EWA transfers). The EWA vendor then debits the EWA transfers and fees and deposits the remaining payroll into the employee’s named account.
If that employee-named account is not of the employee’s choosing, the vendor could be violating U.S. Department of Labor regulations that state:[5]
“The payment of wages through direct deposit into an employee’s bank account is an acceptable method of payment, provided employees have the option of receiving payment by cash or check directly from the employer. As an alternative, the employer may make arrangements for employees to cash a check drawn against the employer’s payroll deposit account, if it is at a place convenient to their employment and without charge to them.”
Regulatory agencies deny mandating a single account for payroll. So, why would it be OK for an EWA provider to require a change to the employer’s entire payroll process?
Nearly 94% of employees are paid via direct deposit[6] to a bank account or prepaid card of choice. Why interfere with a process that is working? The more direct deposit changes required, the greater risk of error in the account change and the greater the administrative burden to either alter or monitor all the accounts.
No other employer-offered benefit requires an employee to change their direct deposit; not Flexible Spending Accounts (FSA), Health Savings Accounts (HAS), Health Reimbursement Arrangements (HRA), or Qualified Profit-Sharing Plans (401K).
EWA is in-between-pay-cycle access to a portion of an employee’s earned wages. So why should EWA providers require a change to someone’s payroll direct deposit?
6. Legal responsibility for third-party direct deposit
Whether your payroll is processed and distributed by a payroll service provider or an EWA provider, in the end, the legal responsibility for accurate and compliant payroll is with you, the employer.[7]
7. Federal and State payroll card regulations
Paying an employee via a payroll card must meet federal and state regulatory requirements to be an acceptable form of payment.
Federal regulations include the Fair Labor Standards Act (FLSA), which states that “payroll cards must allow workers at least one free complete withdrawal per pay period and that unavoidable fees cannot bring wages below the federal minimum.”[8]
Additionally, Regulation E of the Electronic Fund Transfer Act (EFTA) states:
“Regulation E prohibits employers from dictating which financial institution will receive the electronic transfer of the employee’s compensation. This effectively means that employers cannot require employees to receive their compensation through a payroll card; they must offer an additional payment option.”[9]
Free-to-card EWA providers must also meet each state’s payroll card regulatory requirements. Some examples of State regulations[10] include:
>> Voluntary participation in the payroll card program
>> Ability to choose other payment methods such as cash, check, or direct deposit
>> Fee-free cash withdraws
>> Written fee disclosures
>> No initiation, loading, or other participation fees such as balance inquiries
>> No declined transaction fees
>> Provide paper or electronic pay stubs
>> FDIC deposit insurance pass-through
>> Free in-network ATM withdrawals
Finally, the CFPB is increasing scrutiny of “junk fees.” It is currently reviewing and collecting comments on fees,[11] including:
“Prepaid card fees. For people who are unbanked, prepaid cards provide critical access to basic financial services. While someone may choose a card based on their monthly fee structure, they often find additional and unadvertised fees for basic use of the card.”
Evaluate the free-to-card EWA model and vendors
When it comes to free-to-card EWA models, free doesn’t mean zero fees, and free doesn’t mean free of regulatory compliance issues.
The seven criteria above help you ask the right questions when evaluating a free-to-card EWA vendor.
As the idiom goes, you get what you pay for. So don’t let your EWA implementation turn into a cautionary tale about when you fell for the “free” shiny benefit.
Want more information?
We know keeping track of Federal and State regulations can be tedious and time-consuming. At FlexWage, this Is part of who we are and what we do. Don’t rely on a provider’s marketing hype for answers to costly questions.
Want to learn more about Earned Wage Access Done Right? Schedule an introduction call today!
[1] Advisory Opinion: Truth in Lending (Regulation Z); Earned Wage Access Programs, CFPB-2020-0007-0041. (2020, November 30). https://www.regulations.gov/document/CFPB-2020-0007-0041
[2] The Bureau notes that there may be EWA programs that charge nominal processing fees—and thus differ from the fee structure described in this section B (3)—that nonetheless do not involve the offering or extension of ‘credit’ as defined in § 1026.2(a)(14).” By making an exception for “nominal processing fees,” the CFPB acknowledges that instantly moving EWA funds to the employee’s account of choice has a cost.
[3] Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), 81 Fed. Reg. 83934 (November 22, 2016). https://www.federalregister.gov/d/2016-24503
[4] Enforcement Actions for Failure to Register as a Money Services Business | FinCEN.gov. (n.d.). https://www.fincen.gov/enforcement-actions-failure-register-money-services-business
[5]United States Government. (n.d.). Field Operations Handbook – Chapter 30. United States Department of Labor. https://www.dol.gov/agencies/whd/field-operations-handbook/Chapter-30#B30c00
[6] Direct deposit stays on top in new survey on getting paid | Nacha. (n.d.-b). Nacha. https://www.nacha.org/news/direct-deposit-stays-top-new-survey-getting-paid
[7] The Blame for Payroll Errors Is on The Employer. (2019, February 18). IRIS FMP. https://fmpglobal.com/blog/the-blame-for-payroll-errors-is-on-the-employer/
[8] Gelzinis, G., Madland, D., & Valenti, J. (2019, January). How Workers Get Paid Is Changing – Consumer Protections Need to Catch Up. American Progress. https://americanprogress.org/wp-content/uploads/2019/01/Payroll-Card-report-3.pdf
[9] See Footnote 8.
[10] Muniz, K. (2018, February 20). Paycard Laws: Federal and All 50 States. Fingercheck. https://fingercheck.com/payroll-software/paycard-laws-federal-and-state/..
[11] The hidden cost of junk fees. (2022, February 2). Consumer Financial Protection Bureau. https://www.consumerfinance.gov/about-us/blog/hidden-cost-junk-fees/