Alert: the Consumer Financial Protection Bureau enters the space of access to earned wages | Cooley LLP
Two recent actions largely in favor of employer-oriented programs, risks for certain payroll deduction practices noted
Pay-on-demand service providers have become increasingly mainstream employer-facilitated benefits in recent years to help employees avoid predatory alternatives such as payday loans, late fees, and fees. bank overdraft. If employees need money before a pay period, pay-as-you-go providers transfer the money to the employee and later recover the transferred amounts – usually plus a nominal fee – when the employee is paid on. payday. The method of recovering these transfers varies by provider and may include payroll deductions paid directly to the pay-on-demand provider, post-payment debits from employee-controlled bank accounts, or other methods.
While pay-on-demand service providers seemingly offer a win-win product for employees and employers, some conservative employers have waived these offers out of fears that the Consumer Financial Protection Bureau (CFPB) or state agencies Related take the position that such transfers made by on-demand providers were illegal loans, and that state labor departments would take the position that the deductions to recover such transfers were illegal wage deductions. However, in the past two months, the CFPB has issued two actions that should relieve employers considering these products of concerns that the transfers are illegal loans.
Concretely, the CFPB issued its first advisory opinion on November 30. It was a narrow opinion that issued guidelines and a seven-factor framework for examining pay-on-demand. The framework was particularly favorable to employer platforms, without recourse and at low cost. While the opinion applied tightly to no-cost programs, it suggested that low-cost models (those with nominal processing fees) are probably not as credited, and urged providers of these programs to speak to CFPB, including applying to a program called their regulatory sandbox.
On December 30, the CFPB issued an approval order granting an on-demand pay service provider access to the regulatory sandbox. The provider was concerned that some of its services could be considered credit extensions. The CFPB ordinance makes it clear that the evaluated model works by using an employer-facilitated payroll deduction from the employee’s next paycheck. In fact, the CFPB ordinance states that the pay-on-demand provider functions functionally as an employer who pays its employees earlier than the scheduled payday and then deducts the amount paid through facilitated payroll deduction. by the employer. Based on this analysis, the CFPB granted regulatory protection against credit determination for two years to two of the pay-on-demand service provider’s programs. He considered that this was money already earned by the employees in question and that, as such, the programs offered by the employer essentially allow the employee to access their own money and cannot therefore not be credit.
While this model serves to ensure that the services provided are not considered to involve credit, the second fear expressed by employers – that the model may present potential problems under state law regarding payroll deductions. – persists. In fact, the order expressly stated that it refused to determine whether payroll deductions for on-demand pay “comply with state wages and hours laws”. This is because states regulate the types of transactions for which payroll deductions can be used. For example, 47 states have laws that prohibit employers from withholding wages from employees. Many of these laws set out many specific procedural requirements, each of which must be met before an employer can legally deduct an employee’s wages.
For these reasons, the payroll deduction approach continues to face legal risk, even in light of recent CFPB actions. However, employer-based providers with a “low-to-zero” fee model (and who also avoid imposing recourse to employees for non-payment) can breathe a big sigh of relief after these two CFPB actions.