In February 2022, a legal opinion issued by the California Department of Financial Protection and Innovation (“DFPI”) concluded that employer-provided earned wage access (“EWA”) transactions are not loans under the California Financing Law and California Deferred Deposit Transaction Law. The DFPI’s legal opinion stands to provide significant clarity to the EWA industry and should encourage the continued adoption of earned wage access as a solution to employees’ needs for low-cost temporary liquidity.
Before diving into the DFPI legal opinion, we briefly remind readers of the basic structure of EWA programs. Earned wage access is a service that allows workers to obtain wages that they have earned, but have not yet been paid, prior to the worker’s regularly scheduled payday. Although the exact structure of each program differs, EWA programs generally fall into two broad categories:
- Direct To Consumer Models are offered directly to workers, without the employer’s involvement. Any eligible worker can access EWA from a direct to consumer model, as the worker’s employer offering the service is not a prerequisite. Because direct to consumer models do not integrate with employers, recoupment of EWA advances is typically effected through a single-use automated clearinghouse transaction from the employee’s personal bank account on the employee’s payday.
- Employer Integrated Models involve the EWA provider entering into a contract with an employer to offer the service as an employee benefit to the employer’s employees. An EWA provider using the employer integrated model may integrate with the employer’s payroll and time card systems to receive data about the amount of earned wages that an employee has accrued as of a certain date. Employer integrated programs typically fund an earned wage advance through the employer’s payroll system and then recoup the advance through a payroll deduction facilitated by the employer on the employee’s next regular payday.
Some EWA providers charge fees for use of the service, which are typically either flat transaction fees or “participation” fees for use of the program.
As an innovative and emerging product, EWA programs present novel financial regulatory issues. The most significant of these issues is the status of an EWA transaction as a non-credit transaction. Regardless of the model, EWA programs typically restrict the amount that can be advanced to a user to the amount of wages that the user has actually earned and has a property right to, and the transaction carries no recourse to the user if the provider cannot recoup the advance. These features differentiate an EWA transaction from a typical loan.
In December 2020, the CFPB issued an Advisory Opinion (“AO”) in which the CFPB concluded that EWA programs meeting specific criteria are not “credit” for purposes of the Truth In Lending Act and Regulation Z. (We previously addressed the AO in a Legal Update which readers can find here.) The AO relied, among other factors, on the nonrecourse nature of an EWA and the fact that an EWA represents wages already earned and owed to an employee as distinguishing an EWA from a debt obligation that is created by a credit transaction. The AO did not, however, address whether EWA programs are loans or credit products under state laws.
The treatment of EWA programs under state laws has significant implications for EWA programs. For example, many states require companies making consumer loans to obtain a license, and states may impose usury limits that prohibit loans from bearing interest, fees, or finance charges above a certain limit. Both of these types of laws could have a significant impact on EWA providers if the transactions were determined by a state regulator to be a loan.
EWA providers using the employer integrated model received clarity when the California DFPI issued a legal opinion in February concluding that an EWA provider’s employer-facilitated earned wage access transactions do not constitute loans under either the California Financing Law or California Deferred Deposit Transaction Law. The DFPI’s legal opinion was issued in response to a formal request from an EWA provider offering an employer integrated model in California. Requesting a legal opinion from the DFPI is not a step commonly taken by companies; in fact, the DFPI has publicly issued only three opinions interpreting the Financing Law since 2016. Under the EWA provider’s program, the provider facilitated payment of EWAs by the participating employer, with advanced amounts deducted from the employees’ next regularly scheduled paycheck and appearing on the wage statement as an itemized deduction.
The DFPI concluded that the EWA provider’s employer-facilitated transactions were not loans under the Financing Law or Deferred Deposit Transaction Law for two reasons. First, employers, rather than the EWA provider, provided funding for EWAs made under the program, in amounts that did not exceed the employee’s earned but unpaid wages. Second, the fees charged by the EWA provider did not suggest that the EWA product was designed to evade California’s lending laws. (It is notable that the EWA provider charged fees, so it appears that the mere presence of these fees does not automatically cause the DFPI to consider an EWA transaction a loan.) The DFPI noted that the EWA provider had no recourse to a user in connection with a transaction, and that the payment facilitated by the EWA provider “simply satisfies part of an existing financial obligation from the employer to the employee.”
While the opinion is, by its terms, limited solely to the particular facts of the requesting EWA provider’s program, the DFPI’s conclusion is encouraging for EWA providers. It also is consistent with the DFPI’s first-of-its-kind memoranda of understanding with EWA providers that have allowed the providers to offer programs in California since January 2021 without classifying the providers as lenders subject to the California Financing Law or Deferred Deposit Transaction Law.