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Several Earned Wage Access (EWA) providers encourage employers not to use payroll deductions to recover the EWA transferred funds and fees. Coincidently, those providers offer a solution that does not make payroll deductions. Let’s look at a few questions surrounding EWA funds recovery and whether to deduct or not to deduct.
What is EWA?
EWA is a voluntary financial wellness benefit. It allows employees to access their earned wages, when needed, between pay cycles. EWA prevents the high cost and stress of bank overdraft fees, late fees, and short-term loans.
Less money stress increases employee productivity, and early access to pay is also a competitive recruitment and retention tool.
How Do EWA Vendors Recover Funds and Fees?
After an employee makes an EWA transfer, there are two ways to recover the EWA transferred funds (and associate fees if applicable):
1. Payroll deduction. As part of the payroll process, the EWA funds and fee(s) are documented as an after-tax voluntary deduction on the employee’s payroll statement (aka pay stub). The funds are replenished in the EWA funding account, and fees are collected at this time. A monthly itemized statement is provided to the employer.
2. Payroll intercept. Payroll intercept is an extension of the payroll process. After the employer runs payroll, the net payroll record and funds (post taxes and deductions) for employees enrolled in the EWA program are sent to the EWA vendor.
The vendor then extracts the previously paid EWA transfers plus applicable fees. Finally, the vendor deposits the final net pay to a vendor-controlled account in the employee’s name.
If the employer has access to the final deposit, they take the EWA vendor transaction record and verify and reconcile each participating employee’s records.
Liability and Regulatory Compliance of Payroll Intercept EWA Models
Listed below are several questions to consider with a payroll intercept EWA model.
1. Did you sign an agreement with the EWA vendor to deliver an EWA solution to your employees?
If so, you become liable for whatever EWA vendor does that is non-compliant. Regulatory agencies place the responsibility for payroll with you, not the vendor. Therefore, you must thoroughly vet your EWA vendor because you assume their risk.
2. Do you know that most states have specific wage statement requirements?
If you knowingly neglect to report EWA transfers or fees on the employee pay statement, you may violate accurate reporting on the statement of wages.
The payroll-intercept EWA vendor may provide employees with an electronic statement of the EWA transaction; however, the deduction is not documented on the employee’s wage statement.
The Fair Labor Standards Act (FSLA) requires accurate payroll records. One of the items listed is “All additions to or deductions from the employee’s wages.”
Additionally, several states have regulations on the accurate statement of wages. For example, the State of California Wage Theft Protection Act of 2011 states:
“226. (a) Every employer shall, semimonthly or at the time of each payment of wages, furnish each of his or her employees, either as a detachable part of the check, draft, or voucher paying the employee’s wages, or separately when wages are paid by personal check or cash, an accurate itemized statement in writing showing (1) gross wages earned, (2) total hours worked by the employee… (3) the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis, (4) all deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item, (5) net wages earned, (6) the inclusive dates of the period for which the employee is paid, … The deductions made from payment of wages shall be recorded in ink or other indelible form, properly dated, showing the month, day, and year, and a copy of the statement and the record of the deductions shall be kept on file by the employer for at least three years at the place of employment or at a central location within the State of California.”
When the pay statement and the net deposit do not match, it creates confusion for employees.
Finally, if the employee disagrees with the EWA deduction and fee, how do they show proof of the deduction, and whom will they call to correct the issue? If an employee wishes to raise a complaint and cannot go to their employer, a natural recourse is to notify state and federal regulatory agencies.
3. Did the EWA vendor tell you, “If there is no payroll deduction, there is no constructive receipt,” therefore, you shouldn’t make a payroll deduction?
Constructive receipt is an income tax doctrine determining when a taxpayer, who uses cash-basis accounting, has received income.
Whether your EWA provider uses payroll intercept or payroll deduction to fund the EWA funds transfer does not make a difference to constructive receipt.
Additionally, U.S. Treasury has recently proposed amendments to the IRS code indicating the agency is seeking clarity on EWA solutions. According to the U.S. Department of the Treasury Administration’s Fiscal Year 2023 Revenue Proposals (also known as the “Green Book):”
“The proposal would amend section 7701 of the Code to provide a definition of an on-demand pay arrangement as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates. The proposal also would amend section 3401(b) of the Code to provide that the payroll period for on-demand pay arrangements is treated as a weekly payroll period, even if employees have access to their wages during the week. Further, the proposal would amend sections 3102, 3111, and 3301 of the Code to clarify that on-demand pay arrangements are not loans. Finally, section 6302 of the Code would be amended to provide special payroll deposit rules for on-demand pay arrangements. The Secretary and her delegates would be provided regulatory authority to implement the Code provisions addressing on-demand pay arrangements. The proposal would be effective for calendar years and quarters beginning after December 31, 2022.”
Based on our conversations with government regulatory agencies and their desire to assist the under-banked, we do not believe the IRS will treat EWA in a negative manner.
4. Did the EWA vendor tell you that several states will not allow the EWA payroll deduction?
If an EWA provider makes this claim, ask them to provide the list of states and the specific laws that prohibit EWA payroll deductions.
Ballard Spahr, a major law firm, conducted an in-depth independent review of payroll regulation for all 50 states. The uncovered payroll deduction issues dealt primarily with deductions that reduced wages below minimum wage — other significant state regulations centered around fees and whether EWA was a loan. You may circumvent the paystub by avoiding payroll deductions, but that will not prevent the same state-by-state payroll deduction issues.
“FlexWage’s EWA product is not a loan subject to the [California Financing Law (CFL)]. In reaching this conclusion, the DFPI relies upon two necessary elements: (1) employers, not FlexWage, provide EWA funds that do not exceed what they already owe recipients; and (2) the fees charged do not suggest that the product evades California’s lending laws.”
5. Do you know that most states decide if an EWA vendor is a lender (or not) based on the funding source, data accuracy, fee fairness, and process transparency?
If an EWA vendor is considered a lender, they must undergo licensing. Each state has specific licensing requirements, including:
>> Application fees
>> Minimum net worth
>> Specific bond amounts
>> Annual reporting (lack of timely reporting can result in license suspension or revocation)
The opinion from California DFPI affirms what is (and what is not) considered a loan, not simply in California but in most states in the U.S.
Many EWA providers must be licensed as money transmitters due to their process for the collection and disbursement of funds. A recent report estimated that licensing in every state would cost $2.5 million. States also have specific fines for being unlicensed money transmitters that can be as high as $100,000 per occurrence.
Are your vendor’s EWA transactions considered loans? Is your EWA vendor a licensed money transmitter, and if so, in which states?
Regulators don’t care whether the EWA funds recovery is a payroll intercept or payroll deduction. However, regulators will take note of possible action if an EWA Vendor uses payroll intercept to circumvent state or federal regulations. If you have signed a contract with a vendor, legal responsibility for accurate and compliant payroll is with you, the employer (see Footnote 2).
Before accepting the marketing message of any EWA vendor, ask for proof and validate their claims.
>> Do they have opinions from regulators?
>> Are their solutions in line with existing laws?
>> Do they have an ongoing dialogue with regulatory agencies to back up what they say?
Selecting (or extending a contract with) the wrong EWA vendor can be costly to your bottom line, your employee’s financial wellness, and your corporate reputation in your marketplace.
Want more information?
We know keeping track of Federal and State regulations can be tedious and time-consuming. At FlexWage, regulatory compliance 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!