At the end of August 2024, the comment period ended for the Consumer Financial Protection Bureau’s (CFPB) proposed rule to clarify when certain paycheck advance products, including those marketed as “earned wage access,” are subject to Truth in Lending Act (TILA) and Regulation Z requirements.
Jump to ↓
| EWA market growth and adoption |
| CRS insights on EWA regulation |
| Industry response and perspective on CFPB’s proposal |
| Critiques of CFPB’s interpretation of EWA |
| EWA in the context of payroll management |
| Changing state regulatory landscape for EWA |
| Technological advancements and future trends in EWA |
| Treasury Department’s stance on EWA tax treatment |
| Future integration and innovation for EWA |
EWA market growth and adoption
According to a July 2024 CFPB report, earned wage access (EWA) products gained significant traction, with over 10 million workers using them in 2022 and transactions totaling $32 billion. The report also noted that 70% of middle-market companies offer EWA products, 50% of employees with access have used them, and about half of those users accessed EWA at least monthly, suggesting that companies view these products as valuable recruitment and retention tools, especially for younger workers.
CRS insights on EWA regulation
The Congressional Research Service (CRS) also weighed in on EWA after the CFPB announced its proposed rule in July 2024 to explain that these products are currently subject to an increasing “patchwork” of state laws, with significant variations across the country. The CRS further noted that while the CFPB seeks to classify EWA products as credit subject to TILA disclosures, legislation in the 118th Congress, such as H.R. 7428 , seeks to exempt EWA from TILA requirements and impose alternative regulations.
Industry response and perspective on CFPB’s proposal
Tal Clark, Chief Executive Officer (CEO) of Instant Financial, Inc., noted the significant change in posture regarding the CFPB’s new guidance that would classify EWA products as a form of credit subject to the TILA regulations from its previous 2020 advisory opinion, which created a safe harbor for certain EWA providers to avoid being subject to TILA.
“The CFPB’s proposed rule fundamentally misinterprets earned wage access as a form of credit and ignores the 2020 Advisory Opinion that specifically recognizes that EWA transactions do not constitute it as such,” Clark said.
He emphasized that EWA is a “service that enables more prompt payment for work…already performed.” In a comment to the CFPB about their proposal on August 29, Clark stressed that many EWA providers and industry groups strongly oppose the proposal, insisting that these providers and groups contend that classifying EWA as credit and subjecting it to TILA regulations would increase costs and complexity.
Critiques of CFPB’s interpretation of EWA
In its interpretive rule, which received nearly 150,000 comments, the CFPB states that “it does not matter that the obligation to repay is sometimes satisfied via payroll deduction” and that it “is still an act of repayment.” However, Clark believes this “misrepresents what is happening when an employee receives an EWA” since the process involves the payment of funds earned and owed to the employee” as a way to “provide employees with a method of getting their pay faster.”
EWA in the context of payroll management
Clark added that another failure of the proposed guidance is that it does not “take into account that EWA occurs within a payroll context” by overlooking the complexities of payroll management, including tax withholding and deductions, and fails to recognize that EWA payments appearing as deductions on wage statements are simply accounting entries to document payment timing, not evidence of debt.
Clark went on to explain that “[w]hile the advisory opinion acknowledged that a proper legal analysis must focus on the substance rather than the form of a transaction, the proposed guidance completely ignores the substance of EWA transactions and their purpose in the larger payroll universe.”
He believes that EWA is seen in the payroll industry as mutually beneficial for employers and employees, helping with recruitment, retention, and reducing turnover rates for employers, while providing financial flexibility and stress relief for employees.
Changing state regulatory landscape for EWA
Clark also acknowledged the regulatory landscape changes at the state level and now with federal agencies looking to weigh in on this popular benefit. “Now the current regulatory environment that is going on in states like Nevada, Missouri, Maryland, and California, is addressing EWA specifically now…crafting regulation that is specific to EWA,” he noted.
“As an example, if California moves to formalized EWA regulations and reporting requirements associated with EWA” on-demand pay businesses may report under the EWA regulations instead of the loan regulation currently in place. “It’s hard to see any consistency, you know, 100% consistency among these states,” Clark added regarding potential compliance challenges illustrated by the CRS in its July 2024 report.
Technological advancements and future trends in EWA
Despite the potential for regulatory challenges, Clark highlighted some continued advancements in technology related to EWA, suggesting that on-demand pay is evolving to include more financial wellness tools, budgeting features, and potential marketplaces for additional benefits. “[EWA] will become more integrated and more firmly a part of full [human resource] and payroll solutions,” Clark began. “I ultimately believe that employees are going to want to be paid every day, regardless of their rate of pay or whether or not it’s salary or hourly.”
Treasury Department’s stance on EWA tax treatment
This trend may also pose another potential regulatory challenge for employers that offer EWA as the Treasury Department’s fiscal year 2025 revenue proposals again include a measure to clarify the tax treatment of EWA pay arrangements treating such arrangements as a weekly payroll period under Code Sec. 3401(b). However, the Treasury included this proposal in its “Green Book” three times in the past with no legislative action from Congress.
The proposal would also amend Code Sec. 3102, Code Sec. 3111, and Code Sec. 3301 to explain that EWA payments are not loans for federal tax purposes, which contradicts the CFPB’s proposal, and adds more confusion to the attempts of various governing bodies to regulate the industry.
Future integration and innovation for EWA
On the horizon for EWA, Clark continued to predict that in addition to the evolution of payroll and human resource platforms, fintech programs will also see changes “to make [EWA] more readily available and easier access for employees and easier delivery for employers.” He also sees the potential for portability of EWA benefits between employers and how artificial intelligence could be used to provide more tailored financial guidance to users of on-demand pay.
