Earned Wage Access programs can be given non-ready status

In March, the US Treasury Department released its annual report General explanations of revenue proposals from the administration, commonly referred to as the “Green Book”. Among other revenue proposals, the Treasury addressed the treatment of pay-as-you-go arrangements or Earned Wage Access (EWA) schemes, which have grown in popularity in recent years (previously discussed in our Labor and employment). EWA programs typically allow employees to access accrued wages before the end of their regular pay cycle.

While state and federal financial regulators have provided inconsistent guidance on whether EWAs should be considered credit extensions requiring standard consumer disclosures and other protections, a separate concern arises under tax laws. current. Specifically, employees who receive EWA advances may be deemed to be in “implied receipt” of their wages, creating payroll withholding and deposit charges for employers to reconfigure payroll systems to account for this hold and deposit more frequently than the b-weekly or typical deposit. monthly pay cycle. The Treasury Department says in its proposal that EWA suppliers appear to have largely ignored “implied receipt” obligations to date.

To address the issue, the Treasury has proposed the following changes to the Internal Revenue Code:

• Provide a definition of the terms of remuneration on request;

• Clarify that on-demand payment terms are not loans;

• Provide for on-demand pay arrangements to be treated as weekly pay periods, even if employees have access to pay during the week; and

• Provide special deposit rules for on-demand payment terms.

According to the Treasury,[l]Legislation addressing the tax treatment of pay-as-you-go would provide certainty and consistency for taxpayers and establish a uniform, manageable system for the IRS. These changes would come into effect for calendar years and quarters beginning after December 31, 2022.

Put into practice : While the proposal is intended to bring certainty to EWA agreements, it is important to amend the tax legislation to clarify that pay-as-you-go agreements are not loans because, as noted above, CFPB guidance to to date have been less clear when it comes to defining EWA products as credit extensions. Additionally, state regulators have considered and noted other legal considerations, such as state laws that deem the payday advance to be treated as a loan (see here).

In addition to appropriate tax and consumer credit considerations, EWA programs involve multiple hourly wage considerations for employers using EWA agreements, including whether EWA programs:

• Represents an illegal assignment of wages;

• Imposes transaction fees or subscription fees that act as barriers to accessing earned wages;

• Forwards earned wages to an eligible account that releases the employer from its obligations to pay wages; and or

• Constitutes an unauthorized deduction.

As each EWA program typically uses a different framework and approach to delivering EWA, each program should be assessed and assessed individually to appreciate the specific risks that may be presented by the EWA program. Additionally, employers wishing to offer this program to employees or EWA program providers should consult with an experienced employment attorney before rolling out this wage benefit to best position the program for success.