Data Accuracy Differentiates EWA From Payday Loans

Data Accuracy Is An EWA Necessity

Data accuracy is a core component that sets Earned Wage Access (EWA) apart from all other loan solutions, including payday loans.

Estimated reading time: 5 minutes

Image: Dartboard with the word “Data” in the center, pierced with a dart, signifies the importance of data accuracy.

What is EWA?

EWA is a voluntary financial wellness benefit that allows employees access to their net earned wages between pay periods. When emergencies arise, employees can access what they’ve earned instead of bouncing checks, borrowing money, or accessing high-interest credit cards. 

Payday Loans

Payday loans are usually under $500 and have associated loan fees of $10 to $30 per $100 borrowed

“A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent.” 

Consumers must repay these unsecured single-payment loans in full, plus fees, in two to four weeks. To secure the loan, the consumer gives the authorization to access and automatically withdraw from their bank account or supplies the payday loan provider with a post-dated check for the full repayment amount.

A payday loan has no connection to a consumer’s employer or wages. At most, a payday lender may ask for an employment paystub to determine how much to loan a consumer. 

Payday loans are not the same as REAL Earned Wage Access (EWA).

Five Crucial EWA Model Elements

FlexWage pioneered and patented OnDemand Pay, also known as Earned Wage Access, in 2010. Safe, responsible, transparent, and scalable EWA solutions must include five crucial model elements:

1. The employer funds the EWA program.

2. Data accuracy in EWA calculations.

3. Transparent and capped EWA fees.

4. Payroll deduction of EWA transactions.

5. Instant funding to the employee’s account of choice. 

Is EWA Data Accuracy a Requirement for the CFPB?

The Consumer Financial Protection Bureau (CFPB) defined seven elements that must exist for an EWA program to be considered a “Covered EWA Program” and, therefore, free from regulation under the Truth In Lending Act (TILA)

Covered EWA Programs that meet the following seven criteria are not considered an extension of credit and therefore aren’t subject to regulatory requirements and rules. 

The seven criteria are:

(1) Employer-based. The contract for EWA services is with the employer, not the employee

(2) Accrued wages based on actual data. The EWA transfer amount does not exceed the accrued value of earned wages based on data provided by the employer

(3) No fee or nominal processing fees. 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) Payroll deduction. EWA funds recovery is only via a payroll deduction

(5) No remedy. The EWA vendor does not claim remedy for non-recovery of funds

(6) Transparency and confirmation. The employee is notified of the contract for access to the EWA program and funds

(7) No credit checks. The EWA vendor does not do a credit check on the employee

Data Accuracy Defined

The CFPB defined data accuracy for a “Covered EWA Program” in this way:

(2) The amount of each Covered EWA Transaction does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, which amount is determined based upon timely information provided by the employer to the Provider. The Provider may not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates. The “accrued cash value of the wages” are wages that the employee is entitled to receive under State law in the event of separation from the employer for work performed for the employer, but for which the employee has yet to be paid.

“Does not exceed the accrued cash value of the wages the employee has earned”

The CFPB understands that overpayment of earned wages in EWA transactions can lead to multiple attempts by an EWA Provider to recoup the overpayment via payroll deductions or directly debiting an employee’s account. 

Such continual attempts to take back the EWA transferred funds can cause overdrafts of the employee’s bank account, creating even more hardship on the employee (through no fault of their own!) 

Additionally, these Providers will suspend the employee from early access to their earned wages until the provider recoups the funds overpaid due to their own inaccurate calculations. These suspensions punish the employee by preventing access to their financial wellness benefits.

“Based upon timely information provided by the employer.”

Actual payroll and time data at the individual employee level is required to accurately calculate the “accrued cash value of the wages the employee has earned” up to the point they request an EWA transfer. 

“May not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates.”

When accuracy is essential, guessing, estimating, predicting, and imagining don’t cut it. Only data the employer provides about the employee’s pay rate, deductions, and actual hours worked add up to an accurate, accrued, earned wage calculation.

“Wages that the employee is entitled to receive under State law in the event of separation”

When employees are terminated or resign, their final paycheck must be calculated. Making those calculations requires information on their wages and hours worked, additional compensation such as overtime and accrued PTO, federal and state exemptions and deductions, and voluntary benefit deductions.

The EWA program must connect to and access “timely information provided by the employer” to make these calculations.

Actual payroll and time data from payroll and HRMS systems is required to ensure the accuracy of accrued wages.

Does Your EWA Meet The Data Accuracy Requirements?

Many EWA providers contravene the data accuracy condition of the CFPB “Covered EWA program.” Consider, for example, how the following EWA programs do not meet this requirement:     

     >>>> EWA programs that provide up to 50% of gross wages. Gross wages do not meet the requirement of “wages that the employee is entitled to receive…in the event of separation.” 

     >>>> EWA programs that use an employee’s number of hours worked to determine available wages. Calculating EWA based only on hourly pay rate and hours worked data does not meet the CFPB requirement of “wages that the employee is entitled to receive…in the event of separation.”

     >>>> EWA programs that use past paystubs to calculate available wages. Past paystubs don’t provide accurate data on actual hours worked in the current pay cycle or employee deductions. Payday loan providers use paystubs to determine loan amounts. And no, this does not meet the CFPB requirement.

     >>>> EWA programs that determine available wages based on past direct deposit amounts. Some EWA vendors use an employee’s past direct deposit information to determine the amount available for EWA transfer. Visibility to an employee’s bank account direct deposit does not meet the CFPB requirement.

     >>>> EWA programs that use geolocation data to guesstimate hours worked. While clever and very “techy,” tracking employees via their smartphones to their place of employment and counting the number of hours they’re at that location does not meet the CFPB data accuracy requirement.

     >>>> EWA programs based on algorithms and AI calculations. An ingenious algorithm or AI tool does not replace actual data on an employee’s pay rate, deductions, and hours worked. Only actual employee data used to calculate EWA meets the CFPB data accuracy requirement.

The EWA program examples above are all considered credit based upon the CFPB’s requirement. They are all LOANS and are subject to Regulation Z of TILA.

CA Regulations On Overpayment Of Wages

In California, the Division of Labor Standards Enforcement (DLSE) views deductions from wages to recover overpayments to an employee as unlawful deductions under the law.

The California Department of Financial Protection and Innovation (DFPI) discovered in data from EWA providers completing an MOU that “approximately 34% of complaints concerned settlement issues including claims that a consumer was overcharged for a repayment or the payment amount exceeded the advance amount.”

In EWA programs that do not adhere to data accuracy requirements, overpayment of wages is a proven issue.

CA DFPI Requires Data Integration

FlexWage received an Opinion from the California DFPI regarding our EWA solution in February of 2022. One of the critical elements, in their opinion, was the accuracy of the data in calculating available wages for EWA transfer:

Data Integration and Risk of Overpayment. FlexWage integrates with employers’ payroll and time/labor systems and may integrate with additional systems. FlexWage’s data integrations allow it to calculate an accurate net earned wage. FlexWage has represented that this practically eliminates the risk that amounts paid to workers before payday exceeds amounts otherwise due from the employer. Amounts paid and FlexWage’s fees are deducted from employees’ pay and appear on their wage statement as an itemized deduction.

EWA With Built-In Data Accuracy

It might not be trendy or techy, but real EWA uses accurate data to calculate accrued wages.

FlexWage patented the data flow of payroll and time data to deliver the most accurate net wage accrual solution available in the industry today. 

This accuracy, coupled with employer policy controls, virtually eliminates the risk of any overpayment to an employee.

Payroll requires accurate data, regulators require accurate data, and true financial wellness requires accurate data. Accepting anything less puts you and your employees at risk. 

EWA Done Right

FlexWage delivers “EWA Done Right” because it offers the most compliant, responsible, and transparent Earned Wage Access (EWA) solution.

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Keep exploring and learning >>>>>  EWA At A Crossroads: It Is Time To Demand Better