California’s DFPI Says Employer-Built Earned Wage Access Isn’t a Loan
In February 2022, a legal opinion issued by the California Department of Financial Protection and Innovation (“DFPI”) concluded that employer-provided Earned Wage Access (“EWA”) transactions are not loans under California Financing Law and California Deferred Deposit Transaction Law. . The DFPI legal opinion is intended to provide significant clarity to the EWA industry and should encourage continued adoption of Earned Wage Access as a solution to employees’ low-cost, temporary cash needs.
Before diving into the DFPI legal notice, we briefly remind readers of the basic structure of EWA programs. Access to Earned Wages is a service that allows workers to get the wages they have earned, but have not yet been paid, before the worker’s regular payday. Although the exact structure of each program differs, EWA programs generally fall into two broad categories:
- Direct-to-consumer models are offered directly to workers, without employer involvement. Any eligible worker can access EWA from a direct-to-consumer model, as the employer of the worker providing the service is not a prerequisite. Since direct-to-consumer models do not integrate with employers, retrieval of EWA advances is typically done through a one-time automated clearing house transaction from the employee’s personal bank account on employee’s pay day.
- Embedded employer models involve the EWA provider entering into a contract with an employer to provide the service as a benefit to the employer’s employees. An EWA provider using the Employer Integrated Model can integrate with employer payroll and timecard systems to receive data on the amount of earned wages an employee has accrued as of a certain date . Employer-integrated programs typically fund an earned salary advance through the employer’s payroll system, then recoup the advance through an employer-facilitated payroll deduction on the employer’s next regular payday. employee.
Some EWA providers charge a fee for using the service, which is usually either a flat transaction fee or a “join” fee for using the program.
As an innovative and emerging product, EWA programs present new financial regulatory issues. The most significant of these issues is the status of an EWA transaction as a non-credit transaction. Regardless of the model, EWA programs generally limit the amount that can be advanced to a user to the amount of salary that the user has actually earned and to which they have a right of ownership, and the transaction offers no recourse to the user if the supplier cannot recover the advance. These characteristics differentiate an EWA transaction from a typical loan.
In December 2020, the CFPB issued an Advisory Opinion (“AO”) in which the CFPB concluded that EWA programs meeting specific criteria are not “credited” for the purposes of the Truth In Lending Act and Regulation Z (We previously addressed the AO in a legal update which readers can find here.) The AO relied, among other factors, on the non-recourse nature of an EWA and the fact that an EWA represents wages already earned and owed to an employee as distinguishing an EWA from a debt created by a credit transaction. The AO, however, did not clarify whether the EWA programs are loans or credit products under state law.
The treatment of EWA programs under state laws has important implications for EWA programs. For example, many states require companies that provide consumer loans to obtain a license, and states may impose attrition limits that prohibit loans from carrying interest, fees, or finance charges in excess of a certain limit. Both of these types of laws could have a significant impact on EWA providers if the transactions were deemed by a state regulator to be a loan.
EWA providers using the integrated employer model received clarity when California’s DFPI issued a legal opinion in February finding that employer-facilitated earned wage access transactions from a provider of EWA do not constitute loans under the California Finance Act or the California Deferred Deposit Transaction Act. The DFPI legal opinion was issued in response to a formal request from an EWA vendor offering an integrated employer model in California. Seeking legal advice from the DFPI is not a common step for companies; in fact, the DFPI has only publicly issued three notices interpreting the Funding Act since 2016. Under the EWA Provider Program, the provider facilitated the payment of EWAs by the participating employer, with the amounts advanced being deducted from the employees next regular pay check and appearing on the payslip as an itemized deduction.
The DFPI concluded that the transactions facilitated by the EWA provider’s employer were not loans under the Finance Act or the Deferred Deposit Transactions Act for two reasons. First, the employers, rather than the EWA provider, funded the EWAs performed under the program, for amounts that did not exceed the employee’s earned but unpaid wages. Second, the fees charged by the EWA provider did not suggest that the EWA product was designed to evade California lending laws. (Note that the EWA provider charged a fee, so it appears that the mere presence of this fee does not automatically cause the DFPI to consider an EWA transaction a loan.) The DFPI noted that the EWA provider n had no recourse against a user in connection with a transaction, and that the payment facilitated by the EWA provider “merely satisfies a portion of an existing financial obligation of the employer to the employee”.
While the opinion is, by its terms, limited only to the particular facts of the requesting EWA provider’s program, the DFPI’s conclusion is encouraging for EWA providers. It is also consistent with DFPI’s first memorandums of understanding with EWA vendors that allowed vendors to offer programs in California since January 2021 without classifying vendors as lenders subject to California finance law or to the law on deferred deposit transactions. .