South Carolina adopts Earned Wage Access Program regulations

On November 21, 2024, legislation will go into effect in South Carolina, making that state the latest jurisdiction to regulate Earned Wage Access (EWA) programs.

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

To combat such concerns, states have begun implementing rules requiring employers and third parties offering EWA programs to meet certain standards. However, states differ on whether wage advances through EWA programs should be treated as loans. Categorizing EWA advances in this way forces employers and third-party providers to comply with a complex set of banking regulations. Thus, it is important that employers offering or considering an EWA program understand the implications, which vary by state in which the employer operates.

How EWA programs work

Advances in EWA programs are either offered directly by employers as employee benefits or by third-party providers directly to consumers. If an employee elects to advance a portion of their wages through an employer-provided program, the employer or payroll provider deducts the subsequent amount from payday pay to recover the advance. If an employee enrolls in an EWA through a third-party provider, the provider removes the amount advanced 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 paychecks. In employer-provided EWA programs, employers or payroll providers can choose to pay the tax or pass it on to the employee. Fees charged by third-party providers tend to be higher than those charged by employer programs. Third-party providers often charge one-time fees or use a subscription-based model along with asking users for voluntary “tips.”

Employees usually pay. In a report issued earlier this year, Center for Responsible Lending found that 79% of respondents paid expediting fees and 70% of respondents left tips, indicating that employees pay 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 from their paychecks.

Despite these fees, EWA products generally cost less than traditional payday loans, which charge high interest rates in addition to various service fees, 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 past two years, seven states have implemented regulations regarding 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 they want to be more and more regulated.

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

EWA advances are not loans…

In Nevada, Kansas, Missouri, Wisconsin and South Carolina, although EWA programs are not considered loans and therefore not subject to banking laws, they are regulated. Each of these states has enacted legislation that establishes licensing standards, regulates tip requests, and provides reimbursement remedies for employer providers and third-party providers. South Carolina EWA Actthe latest law, will enter into force on November 21, 2024.

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

In addition, third-party providers must comply with state reimbursement and user eligibility requirements. Providers are prohibited from basing their eligibility for EWA programs on scores or credit reports and must clearly state that EWA access is not based on advice. In addition, providers may not charge interest for nonpayment, impose late fees, accept credit cards for reimbursement, use third-party collection services, or enforce reimbursement through a lawsuit.

… Except for Connecticut and California

In Connecticut, employer-provided and third-party EWA advances i am considered loans and must comply with those of the state Small Loans and Related Activities Act (the “Small Loan Act”). The Small Loan Act caps annual percentage rates (APRs) at around 36 percent, compared to an average APR for EWA advances of 367 percent, according to the Center for Responsible Lending 2024 report. Voluntary taxes and tips are included in APR calculations provided by the employer and third parties, according to the state guidance regarding the Small Loans Law. Therefore, Connecticut employers may be required to reduce taxes paid to employees to avoid potential violations. Additional guidance specifically intended for employer-provided EWA programs

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

Similarly, California classifies EWA payday advances as loans and designates providers as financing lenders under the California Financing Act, subjecting providers to increased regulation. From 2025, third-party providers of EWA advances will be required to do so register with the California Department of Financial Protection and Innovation (DFPI) and submit data to the Department in accordance with the new consumer protection measures Rulemaking. Although employer-provided advances are not covered by these regulations, employers should be aware of the DFPI regulations and guidance as employer-provided advances may become subject to such regulations in the future.

Federal limitations remain to be seen

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

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

Takeaways

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

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Gretel Zumwalt, Law Clerk – Admitted in DC, New York Pending Admission in Epstein Becker Green’s New York office, contributed to this article.