3 more states address on-demand pay

The debate over on-demand pay continues to be waged—is it a loan or a wage advance? The answer matters, because state wage payment laws control the deductions you can make from an employee’s pay.

States, along with the Consumer Financial Protection Bureau, are settling the loan-or-wage-advance issue. Three more states have chimed in recently.

Take a gamble in Nevada, show me in Missouri

Nevada and Missouri enacted licensing laws for on-demand pay vendors. This is a big step for on-demand pay vendors, since as far as we know, no state has licensed them before. These laws are similar enough that we can make some generalizations. States enacting similar laws aren’t unusual—once a state finds a successful template, others often follow.

On-demand pay vendors will hold a license for a year in Nevada and two years in Missouri, and renewals will be available. To obtain a license, vendors must jump through a lot of hoops, including paying $1,000 to the state, disclosing the fees they’ll charge employers and employees, and posting a surety bond.

The laws require on-demand pay vendors to:

FLSA Compliance D
  • Respond to questions raised by employees and address complaints in an expedient manner
  • Fully and clearly disclose all their fees, tips or gratuities
  • Allow employees to cancel at any time and without incurring a fee
  • Conspicuously provide an option for employees to select $0 as their tip, gratuity or donation.

Like opinions from other banking regulators, the laws specify that on-demand vendors aren’t making loans to employees. Because they’re not making loans, vendors can’t use employees’ credit reports or credit scores to determine eligibility to participate, charge late fees or interest on outstanding amounts, or report defaults to credit agencies.

Crab walking in Maryland

Instead of enacting a law to regulate and license on-demand pay vendors, the Maryland banking agency issued guidance.

The guidance doesn’t specify whether on-demand pay is a loan. If there’s a third-party vendor and it is a loan and less than $25,000, it would fall under the state’s commercial law. If employers make the on-demand payment, it wouldn’t be a loan or an advance, since the employer owes the employee those funds anyway.

Maryland requires a case-by-case analysis for products provided by employers through third-party vendors. To determine if the third party is the employer’s service provider and not a lender, the banking agency will consider the following factors:

  • Who bears the economic risk? If it’s the third party rather than the employer, the third party would likely be viewed as providing the advance and a lender.
  • What level of contact does the third party have with employees? If employees have minimal contact with the third-party provider, it’s more likely the third party is a vendor/service provider to the employer.
  • Who benefits from any fees or tips employees pay? If the third party receives most of the economic benefit from the transaction, it is more likely to be viewed not as a service provider but as the lender.

Still feeling a little queasy?

We don’t blame you.

Whether on-demand pay is a loan or a wage advance still doesn’t address the crucial payroll question, at least from our point of view: whether employees are in constructive receipt of all or the portion of their pay they’re getting on demand. If employees are in constructive receipt, then your obligation to withhold kicks in.

Only the IRS can answer this question, and so far, it’s not saying.

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