The gig economy and the pandemic are boosting interest in pay solutions that may present legal and regulatory issues.
The pandemic and the gig economy are prompting traditional employers to explore their options for so-called on-demand pay services that put money in the hands of workers when they need it most. US Bank laid out the benefits and potential complications for corporates of some of these solutions at a recent meeting of the NeuGroup for Retail Treasury. Some basic background:
- Today’s technology-driven early pay solutions and apps offer less costly alternatives to high-interest payday loans, credit cards or pawnshops for employees struggling financially during the pandemic.
- Before COVID-19, large and small companies discussed with US Bank their need to offer on-demand wage services to employees to compete for talent in the gig economy.
Beyond gig workers. The use of on-demand pay solutions, common among new economy companies like Lyft and Uber, has spread to more conventional employers.
- In a story this month, PYMNTS reported, “McDonalds and Outback Steakhouse began offering day-of payouts to employees two years ago…and Walmart…introduced a service that allows employees receive early payments through a specialized app.”
- One member at a large US retailer said his company partners with a fintech called Even to offer employees on-demand pay and “we’ve had good success so far.” During COVID, employees at his company have paid nothing for the service, which offers budgeting tools and educational programs for users.
The employer-driven model. Even is an example of an employer-driven model for early pay. US Bank explained that under this approach:
- The employer supplies information on hours actually worked by the employee.
- Advances may be repaid through a payroll deduction or through other means before net pay is delivered to the employee.
- The employer works with the service provider to set standards on how much of the fees they will cover, and the amount of each paycheck available.
- Either the employer or the service provider fund the advances.
- Other companies in this category include SAP FlexPay, PayActiv, Instant Financial, FlexWage and DailyPay.
The employee-driven model. Under this approach:
- The employee provides work information through documentation and/or location tracking.
- The service provider sets the standards for fees and what percentage of payment is available.
- The employee authorizes repayment from a bank account.
- Companies in this group include Earnin and Clover.
Legal issues and risks. Providing on-demand wages comes with risks and raises questions, some of them complicated, US Bank said. That’s one reason more employers have not adopted solutions yet. Here are some questions employers need to ask:
- Does the payment trigger tax and withholding obligations?
- Should wage statements be given?
- Is this an advance or an assignment of wages?
- US Bank’s presenter said employers need to ask on-demand wage providers how they manage state- to-state differences in how early pay is treated.
- She said advances fall under a different body of law that has a long history. “Using technology is what’s making it new,” she said. At the state level, she added, there is a “wide variety of rules about advances.”
- Is this lending?
- This question is particularly relevant when the service provider funds the payments.
- How are state and federal regulators and legislatures responding?
- US Bank said 11 states are investigating advance payment to employees as unlicensed lending.
- What happens when proceeds are paid to a payroll card?
Data integration. US Bank’s presenter said a lot of payroll services have relationships with earned-wage providers, so that the data integration to make the product work is already in place, meaning the technology lift is not so hard. She recommended corporates selecting an on-demand provider find out which payroll processors have already done integration with the providers.