Earned Wage Access Gains Popularity as Legal Guidance Lags

Earned wage access is increasingly becoming a popular benefit employers can offer to employees, even as its regulatory landscape lags behind, two attorneys said March 11.

The basic idea of EWA, that employees can access wages for work already performed, is intended to provide employees with more financial flexibility and security, according to Kathleen Caminiti, a partner at Fisher & Phillips LLP. Employers can either advance wages to employees who request it themselves or use a third party to advance payments, she said.

Employers offer EWA because employees like it, said Ellie Miller, an attorney at Fisher & Phillips LLP. She cited studies showing that Generation Z and millennial employees were most likely to resign in 2023, but also that 78% of workers in those generations thought that earned wage access would increase their “company loyalty.” EWA is a benefit that employers might offer to attract and keep employees, she said.

Miller then compared EWA to remote work as a benefit that is offered by employers and becomes popular with employees. Once established, it becomes something employers “need to offer in order to be competitive,” she said.

Caminiti and Miller spoke at PayrollOrg’s Capital Summit in Arlington, Virginia.

Labor Laws Lag Behind

“The headline is easy, the devil is in the details,” Caminiti said of EWA compliance.

Labor laws do not contemplate EWA as a way to pay employees, raising a number of issues with existing law, Miller said. Minimum wages come into consideration when fees are charged for using EWA. A deduction for fees would violate the Fair Labor Standards Act if they brought the employee’s wages below the minimum wage, she said.

Employers should set a maximum amount that can be advanced, either a percentage of wages or a dollar amount, Caminiti said.

The payment delivery method is another concern, especially for programs that rely on debit cards. At the federal level, employers are prohibited from requiring employees to use a payroll card to receive wages, as the law requires employers to offer an alternative payment method, Miller said.

The Treasury Department has at least proposed amendments to the Internal Revenue Code that would address withholding from EWA payments and when wages are considered paid, Miller said.

But “the state law issues and challenges are really the bigger challenges” with EWA, Caminiti said. About half of the states have some regulation that addresses EWA, but the level of detail varies considerably, she said. Usually participation in EWA must be voluntary, Caminiti said.

Those working for or with a multistate employer should “really know everything about all of those states, because you don’t want a misstep,” Caminiti said.

Relevant areas of law that states control include pay frequency, deductions, and pay statement requirements, Caminiti said. Deductions often require a notice period of a set number of days and written authorization by the employee, she said.

Wage assignments may be regulated or prohibited, as in California, and states may also have additional requirement for payroll cards, Caminiti said.

Takeaways for Employers

One of the tips Caminiti and Miller gave employers was to ensure compliance by developing a written EWA policy and train employees who are establishing, enforcing, and communicating the policy on what it contains.

Employers should follow federal and state recordkeeping requirements, document employee consent where needed, and of course stay up to date on laws, Caminiti said.

Businesses using a third-party EWA provider will have to share employee data and payroll information with the provider, making data breaches a risk, and some states have additional data privacy laws, Miller said.

An employer may also be held liable for the full amount of garnishments that aren’t handled correctly, she said. In particular with EWA, if an employer allows an employee to advance too much of their pay, there might not be enough wages remaining on payday to withhold for the garnishment, Miller said.

When using payroll cards, employers should remember that their use cannot be mandatory and that any fees do not violate applicable laws on deductions, Caminiti said.

Finally, the choice of provider is important, because they will have access to employee data and potentially large amounts of money, Caminiti said. The employer always has the ultimate duty of paying wages, but other responsibilities should be clearly identified and divided between the employer and the vendor.

Caminiti cautioned attendees not to rely completely on the provider, and that neither should the provider rely completely on the employer. “Two minds are better than one,” she said.