On November 21, 2024, legislation will take effect in South Carolina, making that state the latest jurisdiction to regulate earned wage access (EWA) programs.

EWA programs are generally targeted towards lower-wage earners, allowing employees to obtain a portion of their paycheck before the employer’s scheduled payday. While EWA can be a lifeline for employees living paycheck to paycheck, consumer advocates worry that hidden and not-so-hidden fees associated with such programs could increase users’ aggregated debt, to the detriment of their long-term financial well-being.

To combat such concerns, states have begun to implement rules requiring employers and third parties offering EWA programs to abide by certain standards. States differ, however, on whether payroll advances though EWA programs should be treated as loans. Categorizing EWA advances in this way obligates employers and third-party providers to abide by a complex set of banking regulations. Thus, it is important for employers that offer or are considering an EWA program to understand the implications, which vary depending on the states where the employer does business.

How EWA Programs Work

Advances under EWA programs are either provided directly by employers as a benefit to employees or by third-party providers directly to consumers. If an employee opts to advance a portion of their paycheck through an employer-provided program, the employer or payroll provider reduces the subsequent paycheck amount on payday to recover the advance. If an employee enrolls in an EWA through a third-party provider, the provider removes the advanced amount from the employee’s direct deposit account on payday.

Both types of programs usually come at a price, especially if employees want instant access to wages. In employer-provided EWA programs, employers or payroll providers can choose to pay the fee or pass the fee onto the employee. Fees charged by third-party providers tend to be higher than those imposed by employer programs. Third-party providers often charge one-time fees or use a subscription-based model along with soliciting users for voluntary “tips.”

Employees usually pay up. In a report issued earlier this year, the Center for Responsible Lending found that 79% of respondents paid expediting fees and 70% of respondents left tips, indicating that employees are paying considerable fees for these programs. Employers have tried to regulate employee debt cycles with these programs by limiting the amount that can be advanced or the number of times per week employees can request funds against their paycheck.

Despite these fees, EWA products generally cost less than traditional payday loans that impose high interest rates in addition to various service charges, according to the United States Government Accountability Office report on financial technology.

State Regulations

Employers with EWA programs may be subject to state regulations, and those considering such programs should be aware of their potential compliance obligations. In the last two years, seven states have implemented regulations on EWA advances, and lawmakers in several other states, including Virginia, Georgia, New Jersey, Texas, North Carolina, Mississippi, and Vermont, have proposed similar legislation, indicating that such programs will be increasingly regulated.

While five of the seven states that have already established regulations classify wage advances as distinct financial products or cash advances, the other two states — California and Connecticut —categorize wage advances as loans.

EWA Advances Are Not Loans…

In Nevada, Kansas, Missouri, Wisconsin, and South Carolina, although EWA programs are not considered loans and thus are not subject to banking laws, they are regulated. Each of these states has enacted legislation setting licensing standards, regulating tip demands, and providing repayment remedies for employer-providers and third-party providers. South Carolina’s EWA act, the most recent enactment, will go into effect November 21, 2024.

Typically, under each state’s laws, employers, payroll providers, and third-party providers are required to register with a state regulator, supply financial information, and attest to their ability to adequately offer EWA advances. All providers must inform employees of their rights before they sign an EWA agreement. If passing fees to employees, employers should consult with counsel to confirm that such fees are adequately disclosed and ensure state regulations do not require employers to provide a completely free alternative. Third parties soliciting users for tips must provide an option not to leave a tip and must clearly disclose that tips are not shared with employers and do not benefit any particular individual.

Additionally, third-party providers must comply with state repayment and user eligibility requirements. Providers are prohibited from basing eligibility to EWA programs on credit scores or reports, and must clearly state that EWA access is not based on tips. Further, providers cannot charge interest for non-payment, impose late fees, accept credit cards for repayment, use third-party collection services, or compel repayment through a lawsuit.

… Except in Connecticut and California

In Connecticut, employer-provided and third-party-provided EWA advances are considered loans and must be compliant with the state’s Small Loan Lending and Related Activities Act (“Small Loan Act”). The Small Loan Act caps annual percentage rates (APR) around 36 percent, in contrast to an average APR for EWA advances of 367 percent, according to a Center for Responsible Lending 2024 report. Fees and voluntary tips are included in employer and third-party provided APR calculations, according to state guidance on the Small Loan Act. Therefore, Connecticut employers may be required to reduce fees passed to employees to avoid potential violations. Additional guidance specifically targeted at employer-provided EWA programs

requires Connecticut employers that pass EWA program fees to employees to obtain written authorization from the employee on forms approved by the Connecticut Commissioner of Labor, among other obligations.

Similarly, California categorizes EWA payroll advances as loans and designates providers as finance lenders under the California Financing Law, subjecting providers to increased regulations. Beginning in 2025, third party providers of EWA advances will be required to register with the California Department of Financial Protection and Innovation (DFPI) and submit data to the Department, pursuant to new consumer protection regulations. While employer-provided advances are not covered under these regulations, employers should stay up to date with DFPI’s regulations and guidance, as employer-provided advances could become subject to such regulations in the future.

Federal Limitations Remain to Be Seen

Even if employers abide by state regulations, federal regulators could mandate stricter oversight of EWA programs. In July, 2024, the Consumer Financial Protection Bureau (CFPB) proposed an interpretative rule to reverse a 2020 advisory opinion. If finalized, the rule would categorize all EWA products, including employer-provided products, as consumer credit subject to the Truth in Lending Act (TILA) and its implementing rules (Regulation Z).

Implementing a payroll scheme to track and repay advanced wages is already complex for employers, and complying with Regulation Z could require employers to retain more specialized staff and exert more technical resources. However, in light of the upcoming change in federal government leadership, these guidelines and rules may be revised or overruled.

Takeaways

Navigating the increasingly complex state and federal regulatory scheme for EWA providers is no easy task, and employers that are considering such a benefit must assess how the varying approaches in relevant jurisdictions may affect the use of this product. Employers offering EWA, as well as payroll providers and third-party EWA vendors, should consult with counsel to ensure their policies and procedures comply with current regulations and can be adapted to future regulations.

Gretel Zumwalt, a Law Clerk—Admitted in D.C., New York Admission Pending in Epstein Becker Green’s New York office, contributed to this article.