Are your employees taking out payday loans to stay current on bills or cover expenses that occur before payday? You may know that payday loans charge exorbitant interest to borrowers, and are therefore strictly regulated by law in the state of California, which is known to have a strong interest in the financial security of its residents. But payday loans may soon become a thing of the past due to the latest way for employees to have wages in hand before payday rolls around: earned wage access services.
Earned wage access services are generally app-based services, such as EarnIn and DailyPay, which allow employees to get cash in hand based on their earnings before their employer distributes regular pay. Earned wage access services generally follow two basic business models. Companies such as EarnIn offer app-based access that connect directly to an employee’s bank account: determining past wages, providing cash prior to payday, and deducting repayment directly from the employee’s account on payday, or the repayment date. Another model, used by DailyPay and similar companies, involves connecting to a company’s payroll system to pay employees cash based on what they have already earned without waiting until payday.
Earned wage access services are compensated by employees through subscription service fees, fees to expedite access to wages, and tips made to the service by the employee. Upon first glance these services appear to be a far better wage advance option for employees than the payday loan and its heavy interest rate-but are they truly advantageous to employees and should they be allowed to operate unregulated? The California Department of Financial Protection cannot answer “yes” to that question.
Statistics show that when subscription fees, other fees for accessing early wages, and tips are added up, the cost to the employee does not fall far behind the cost of the payday loan. To protect its lower income residents, who make up a disproportionately higher number of payday loan and earned wage access service users, the state of California is taking proposed action to pull earned wage access services out of the gray area and into the web of regulations that currently govern payday loans. Charges, tips, and fees would be limited, and earned wage access services would be required to be licensed in the state of California.
Consumer protection groups and industry trade organizations are both providing input on their positions on the proposed action. Final rules are expected to be finalized by March 2024.