Since the pandemic, and with a cost-of-living crisis, the number of companies offering advance paycheck products — sometimes referred to as “earned wage access,” or EWA — has grown rapidly, as has the number of workers availing themselves of these products on a frequent basis. This has given rise to concern among legislators that employees are paying for the privilege of expedited access to their earnings.

First, payroll frequency depends on several factors. Some countries have legal requirements setting pay frequency — and in some cases, rules regarding when paydays should occur. Second, pay frequency might be regulated in certain industries by collective agreements, even if there is no statutory regulation.

While the norm in most countries is to pay monthly, in the US, regulations on payroll frequency vary from state to state. According to a survey conducted by the US Bureau of Labor Statistics, the most common pay frequency in 2020 was biweekly (43%), followed by weekly (33.3%), semi-monthly (19%) and monthly (4.7%).

EWA programs — also known as on-demand pay, daily pay or early wage access — have largely operated with minimal legal constraints because they have generally been characterized as money-transmission services rather than loan services. There are two main models commonly referred to as EWA: employer integrated and direct to consumer. However, only the employer-integrated model can accurately be called EWA.

Unlike the direct-to-consumer model, which comprise short-term, high-cost payday loans with steep fees and high interest rates, EWA products have developed to provide employees access to the wages they have already earned. Credit checks are not required, nor do late payments incur penalties on the customers’ credit scores. Late fees and debt collections are also not a feature.

However, there are fee structure variations that are a cause for concern: Many financial providers operate with a subscription fee or percentage commission on transactions. Alternatively, the employer pays the fee as an element of their staff well-being packages to improve employee retention. In the US, however, some platforms have implemented a “free” service in which customers can “tip” the provider for its service.

Some states, meanwhile, are beginning to establish guardrails for these products. South Carolina recently passed SB 700, which goes into effect on Nov. 21, joining Nevada, Missouri, Wisconsin and Kansas in applying specific criteria for organizations with programs that provide EWA to employees. 

These states exclude qualified EWA programs from having to follow state consumer loan requirements if the programs meet the law’s criteria including a registration process and provision of a surety bond. Registration must be renewed annually, and there are reporting requirements. South Carolina’s law also prohibits providers from, among other things:

• Sharing with employers any fees, voluntary tips, gratuities or other donations charged to employees for EWA services;
• Charging late fees, interest or any other penalty for failure to repay outstanding proceeds;
• Charging deferral fees; 
• Requiring a credit score from participating employees to access EWA and reporting outstanding proceeds to a consumer credit reporting agency or a debt collector; and
• Filing lawsuits or using debt collectors to compel employees to pay any outstanding amounts.

The law also covers programs providing payments made to nonemployee contractors.

At the federal level, the Consumer Financial Protection Bureau is proposing an interpretive rule and says it will work with federal and state partners to ensure that emerging paycheck advance companies are “playing by the rules.”

Across EU countries, while EWA providers and employers must observe certain financial and employment laws, no specific framework for regulation exists.

Despite proponents framing these advances as a service to employees allowing them to access wages they have earned, others view EWA and cash advances as credit products that must be regulated as such. The trend seems to be in favor of regulation, so employers should take note.