As peer-to-peer payment applications proliferate and on-demand technologies reach new facets of people’s lives, it is only natural that these programs now offer services geared particularly for employees. On-demand, daily pay apps, also known as “instant pay” or “earned wage access” are the outgrowth of two fundamental truths: (1) millions of Americans live paycheck to paycheck; and (2) employees perform their actual work and earn their actual wages up to two weeks before they receive their paychecks.
Instant pay apps offer to bridge the gap between when one’s expenses come due and one’s paycheck issues, by allowing employees to withdraw the wages they have already earned for work performed in a pay period, before the regular pay date. Hailed as a panacea by employees, who otherwise would be vulnerable to predatory payday loans, these instant pay apps unsurprisingly implicate multiple California wage and hour laws that an employer must comply with. As a result, employers considering rolling out these programs must carefully balance their potential legal risk against the benefit these apps offer employees, and should understand the potential protections available to an employer.
I. The Emergence of Instant Pay Apps
Over the last six years, numerous companies entered the pay day space and began offering immediate access to earned wages, including DailyPay, Earnin, PayActiv, Even, Instant Financial, and others. Each company offers slightly different services and partners with employers in different ways, but the core premise is the same: allow employees to instantly access the earned portion of their wages without having to wait until the normally-scheduled pay date. Then, on the normal pay date, and depending on the particular company, the employer transmits the employee’s net wages (i.e. those that the employee did not instantly access from the app) either to the employee’s bank account, a separate account through the pay app to which the employee has access, or loads the balance on a debit card.
Unlike traditional, payday loans, instant pay apps do not advance future wages or charge interest. Instead, they provide employees access to already-accrued wages, typically for a flat fee per transaction. This defining feature of instant pay apps frees employees from potential usurious payday loans that penalize an individual who may need only a few extra dollars a few days early in order to make ends meet.
These apps no longer exist merely on the fringes. To the contrary, large multinational companies now offer various instant pay apps and options to their workers. With major employers like these leading the way, it is expected that other businesses, both large and small, will want or need to consider providing this type of benefit to their employees.
II. Principal Wage and Hour Considerations for California Employers
California’s labyrinthian wage and hour laws make traditional payroll compliance hard enough. Instant pay apps, which in some sense turn every day into a potential pay day, inject additional legal considerations into the mix that employers must appreciate as they evaluate whether (or how) to offer this type of benefit. While not exhaustive, the following represent some of the primary wage and hour concerns implicated by instant pay apps.
A. Assignment of Wages
Each instant pay app employs a different system for advancing the employee’s earned wages, recouping those amounts from the employer, and transmitting the net balance to the employee on the regular pay date. The presence of a third party in the wage payment structure potentially implicates California laws regarding the voluntary assignment of wages.
California Labor Code § 300 contains a detailed statutory scheme regulating the assignment of wages. Among other things, to be valid: (i) an assignment of wages must be contained in a separate signed written instrument; (ii) if the assignment is by a married person, the assignment must attach the spouse’s written consent; (iii) the employee must deliver notarized versions of the written authorization(s) to the employer; and (iv) no other assignment of wages of the employee is also subject to payment at the time the assignment is filed with the employer. See Cal. Lab. Code § 300(b). Even if an employee satisfies this multifactor test, California limits the amount of any assignment of wages to 50% of the employee’s wages. Id., § 300(c).
Depending on the precise mechanisms involved with the particular pay app, employers utilizing an instant pay app may be unknowingly running afoul of Labor Code § 300. For example, an instant pay app may direct an employer to transmit the employee’s net wages, after any instant withdrawals, to a particular account that the employee has set up with or through the instant pay app. If the “account” is not one that an employee can directly or indirectly control or access, like a traditional bank account or payroll debit card account, an employer may have unintentionally assigned an employee’s wages to a third party, without necessarily complying with the statutory scheme.
B. Transaction Fees
Most, but not all, of the major instant pay apps levy some sort of transaction or subscription fee on users. Even though these fees tend to be nominal, the existence of transaction fees touches upon California’s rules prohibiting employers from interfering with their employees’ ability to access their wages.
Outside of direct deposit, California employers are generally required to pay wages in cash or by instrument negotiable in cash, on demand and without discount. See Cal. Lab. Code § 212(a). As the Division of Labor Standards Enforcement (“DLSE”) explained in the context of payroll debit cards, employers cannot “impos[e] conditions or obstacles which interfere with or prevent an employee from promptly receiving their due wages in full.” See Opinion Letter 2008.07.07 at 8. The imposition of a fee in order to readily access one’s earned and paid wages, as can be the case with payroll debit cards, “could impermissibly interfere with an employee’s receipt of paid wages by creating a financial condition which would have the effect of reducing or discounting wages” if the fee is charged against the same account in which wages are deposited. Id.
It is not a far stretch to foresee the DLSE extending its reasoning regarding fees for accessing payroll debit card wages to the instant pay app realm. Just as with payroll debit cards, imposing some sort of transaction or subscription fee against employees in order to be able to access their earned wages on demand could rise to the level of an impermissible condition or obstacle to accessing wages.
Importantly, though, the DLSE’s opinion letter concerned a situation in which the payroll debit card program was “designed to discharge the employer’s wage payment obligations.” Instant pay app companies, depending on how they structure their relationship with a particular employer, may be able to establish that they are not discharging the employer’s wage payment requirements, but instead represent an employee benefit that is independent and apart from the employer’s payroll obligations.
For some employers, the answer is to simply pay the fees on behalf of their employees and moot this potential issue altogether. But for those employers unable to bear this additional cost, it will be critical to understand how the instant pay app company operates to discharge the employer’s payroll obligations, if at all.
C. Lawful Payment of Wages
Additionally, an employer’s depositing of an employee’s wages in an account set up through the instant pay app may not run afoul of California law regarding direct deposit of wages. California Labor Code § 213(d) enables an employer to directly deposit an employee’s wages “in an account in any bank, savings and loan association, or credit union of the employee’s choice with a place of business located in this state, provided that the employee has voluntarily authorized that deposit.” Section 213(d) also requires that an employee authorize direct deposit of wages.
As concerns instant pay apps, it is not clear that all “accounts” are created equal for purposes of Section 213(d). It may be that an employee has access to an “account” maintained through the instant pay app. But simply using the word “account” does not necessarily make it such. What is necessary for an employer to understand is where that account is maintained. An account created for an employee on an instant pay app does not automatically mean that the “account” is held in a bank or other qualified financial institution under Section 213(d).
Regardless, employers must be sure that the employee has specifically authorized the deposit of instant pay apps to the account in question. Typically, most employees execute a direct deposit form for a bank or other qualified financial institution as part of the onboarding process. This type of authorization may not extend to the deposit of funds in a separate account created or maintained by the instant pay app. Indeed, an employee who signs up for an instant pay app may not realize during the registration process that they are having their wages deposited somewhere other than where they originally authorized. At the very least, an employer offering this type of program should obtain a revised authorization form directly that relates specifically to the instant pay app.
D. Unauthorized Wage Deductions
As a general rule, employers can only withhold amounts from an employee’s wages when expressly authorized in writing by the employee. See Cal. Lab. Code § 224. With instant pay apps, however, it is not perfectly clear that the employer has complied with the wage deduction requirements. Some instant pay apps debit employee bank accounts the advanced wages after receiving the employee’s full paycheck from the employer. Other instant pay apps may more directly receive in an employee account the employee’s full wages from the employer, and then redirect the advanced wages and fees out of that account. However a particular instant pay app does it, it is important that employers obtain whatever authorizations are necessary from their employees to stave off a potential wage deduction lawsuit.
Instant pay apps also pose problems in administering final pay to separating employees. Under California Labor Code Section 203, an employer who makes an improper deduction from an employee’s final wages may be subject to waiting time penalties up to 30 days’ of the employee’s full pay. This becomes a potential issue if an employer has some obligation to repay the instant pay app for any amounts the instant pay app fronts or advances to the employee. In such a circumstance, the employer may not be able to simply deduct those amounts from the employee’s final paycheck.
III. Additional Laws and Regulations
Employers considering implementing instant pay apps must be mindful of more than just traditional wage and hour laws. For example, at the federal level, instant pay apps may touch upon the Truth in Lending Act, the Electronic Fund Transfer Act, and the Anti-Money Laundering and Bank Secrecy Act. At the state level, employers who are sharing personally-sensitive information about employees with an instant pay company must comply with data security and privacy laws, including appropriate disclosures to employees and obtaining employee consent. Navigating this bespoke web of potentially relevant laws is critical for any employer thinking of providing this employee benefit.
Instant pay apps are continuing to grow in popularity and prevalence. Like any employee benefit, they may not be for every company. A threshold question employers must answer is whether these instant pay apps, with their untested and semi-novel legal issues, are worth the heavy administrative burden required to roll them out. Employers offering instant pay apps may have to devote administrative resources towards obtaining appropriate authorizations, transmitting employee wage and time data to the instant pay app, and ensuring final pay is calculated correctly.
For employers able to handle this administrative cost, it is imperative that the employer closely scrutinize the terms and conditions of the particular instant pay app they want to implement. Each instant pay app is different and employs different procedures and processes for offering access to earned wages and what the employers’ responsibilities and obligations are under the program. The old maxim rings true: the devils are truly in the details.
For now, it looks like instant pay apps are here to stay. Given the direct interplay with traditional payroll concerns, regulators must take notice of this emerging benefit and respond with guidance. Until then, employers deploying this employee benefit should advocate for strong defense and indemnification agreements from the instant pay app provider of choice in light of the uncertainty of the legal issues implicated by instant pay apps. Employers serious about offering instant pay apps need to consult with employment counsel prior to rolling out this type of payroll benefit.