NAVIGATING THE COMPLEXITY OF EARNED WAGE ACCESS FOR PEOS

In the not-so-distant past, options to provide a pay advance prior to payday were not only limited, but they also were potentially expensive for the employee and were viewed in a negative light by some segments in our society. However, in the past five years, this mindset has changed greatly in the way employers are viewing these requests (i.e., early access to wages) and they are now looked upon as a necessary benefit employers need to provide to their employees. Now early or earned wage access (EWA) is looked at as a commonplace event from a payroll perspective, with a lot of different options on how to administer it. It is something that PEOs must manage while being extremely mindful of EWA from a process and compliance perspective.

There are a number of studies that have been conducted recently that show the increased adoption for EWA programs and why they are growing in popularity.

KEY FINDINGS

The ability to put aside money by employees from their paychecks has decreased significantly in the past couple of years. Recent studies show that 55%- 63% of Americans are living paycheck to paycheck (reference 1).

This is not limited to lower wage earners. According to Wills Towers Watson, 36% of U.S. employees with salaries of $100,000 or more are living paycheck to paycheck, double the share from 2019 (reference 2).

Personal finance is ranked as a leading cause of employee stress in the U.S. and nearly 50% of American employees suffer from financial stress. Financially stressed employees lose about a month worth of productive workdays each year due to shifted focus and they are twice as likely to seek a new job opportunity (reference 3).

The growth of the gig economy is expanding three times faster than the total US workforce. Over 50% of the US workforce is likely to participate in the gig economy by 2027 with a majority of this population being made up of workers in the 18-34 age range (reference 4).

Macro-economic conditions are making access to employee wages prior to a scheduled pay date for workers being more critical than ever. Rising interest rates, increased inflationary pricing for key consumer goods, and stagnant wage growth means employees are struggling to wait until pay date to access their paychecks.

GREATER ADOPTION OF EWA REGULATIONS

To manage the growing popularity of EWA, approximately 20% of companies (employing 15 million hourly workers) now have the ability to provide EWA programs, according to a report from Gartner (reference 5). Since EWA is a relatively new payroll service offering and one that has expanded rapidly with a number of vendors entering the space, regulation and compliance is evolving quickly. New legislation has been enacted recently in many states.

Nevada was the first state to adopt an EWA law this past June (reference 6). It includes provisions like required licensing by EWA providers, defining the services offered by EWA providers, and clarifying that EWA is not a loan. Missouri followed with its own legislation in July 2023.

Other states are now ramping up efforts to implement legislation to regulate EWA programs. They include (but are not limited to) California, Georgia, Kansas, Mississippi, New York, North Carolina, Texas, Vermont, and Virginia.

At the federal level, there is still ambiguity on how EWA should be managed. In 2020, the Consumer Financial Protection Bureau (CFPB) issued some advisement that EWA services as defined today are not considered loans or extended credit as part of the Federal Truth in Lending Act. Additional guidance was supposed to come in June 2022 from the CFPB but to this point, nothing of substantial consequence has been provided (reference 7).

This increased demand for evolution in the payroll industry from EWA is creating challenges for PEOs because of the way these wages are recognized and administered. As the co-employer, PEOs have to carefully navigate unique requirements (especially at the state level) because of the way the wages are classified, the timing of paying them, how they are calculated, and to ensure they meet appropriate statutory minimums. In addition, because payroll providers have traditionally administered the payment of wages on a defined cycle (i.e., structured pay period for hours worked with regular paid on date), this is a significant process change for payroll providers to change their processes and technology to administer accurately and in a timely manner. Because employees view their payroll income as an area of credibility from their employer, it is critical that PEOs are able manage EWA compliantly and accurately as the adoption of EWA only continues to expand and evolve.

There is a generational shift in the workforce that is occurring, with employees demanding a need for modern pay experience that supports financial flexibility and a sense of fairness for workers. This means that EWA is here to stay in the PEO industry as a hot topic and an issue for our industry to manage appropriately.

REFERENCES

1. Steele, J. & Martin E.J. (2023, September 18th) Living Paycheck to Paycheck Statistics. Bankrate.com. Living Paycheck to Paycheck Statistics | Bankrate
2. Iacurci, G. (2022, June 16th) Amid high inflation, 36% of employees earning $100,000 or more say they are living paycheck to paycheck. CNBC. 36% of high earners are living paycheck to paycheck (cnbc.com)
3. Automatic Data Processing (2022) Earned Wage Access: Tapping into the Potential of Flexible Pay for Today’s World of Work. ADP. adp_ewa_study_whitepaper.pdf
4. Team Stage (2023) Gig Economy Statistics: Demographics and Trends in 2023. Gig Economy Statistics 2023: Demographics and Trends | TeamStage
5. Gangemi, J. (2021, April 28th) What Is Earned Wage Access, and Should You Provide It? Staffing.com What Is Earned Wage Access? Should You Provide It? | Staffing.com
6. Coniglio, L. (2023, June 23rd) Nevada Becomes First State to Enact Earned Wage Access Law. Payroll.Org Nevada Becomes First State to Enact Earned Wage Access Law (payroll.org)
7. Consumer Financial Protection Bureau (2020, November 30th) Consumer Financial Protection Bureau Finalizes Advisory Opinions Policy and Announces Two New Advisory Opinions Consumer Financial Protection Bureau Finalizes Advisory Opinions Policy and Announces Two New Advisory Opinions | Consumer Financial Protection Bureau (consumerfinance.gov)

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.