Risk And Compliance Considerations

Understanding what laws and potential pitfalls come with instant pay technology

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Wage and Hour Laws: The Importance of Structuring Your Daily Pay Program to be Compliant

Wage and hour laws are a hornet’s nest of complexity.

Class action lawsuits, Private Attorney General Actions (PAGA), unfederated and state-by-state laws all raise the bar on employers needing to remain compliant with wage and hour laws.

As recent as July 2018, Starbucks was found guilty of violating wage and hour laws for not paying employees for post-closing activities such as locking the door and turning off the lights.  

When offering a daily pay benefit at your company, here are the main Wage and Hour considerations to be mindful of.

Wage Deductions

Some daily pay programs are structured so that the employer is on the hook for deducting the amount of advances from the employees’ final pay on payday. While this may seem similar to other types of deductions such as healthcare, it is actually quite different.

In 14 states (including California and New York), deducting advance wage amounts is an illegal wage deduction. Additionally, it is ambiguous in an another 9 states.  

Some vendors may try to get around this restriction by directly debiting the employees’ bank accounts. Proceed with caution! While it may be perfectly legal, offering a program that relies on a vendor directly debiting your employees’ accounts will only lead to HR and payroll headaches.  

In addition, it feels too close to a payday loan, where the lender continues to debit the employees’ account until it is paid back.

Tax Compliance

While not specifically a wage and hour requirement, tax compliance is a closely related topic.

If the company is funding the advances itself, it is required to file employee withholding taxes. This is because the IRS views company funded advances either as (i) payroll or (ii) loans.  

Under the assumption that the company does not wish to make a loan to its employees, the only alternative is payroll which requires a daily IRS withholding, assuming the company wishes to remain in compliance.

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Are there any penalties associated with offering a daily pay benefit?

There are two significant penalties to watch out for in a daily pay program:

IRS Failure to File Timely Tax Withholdings

When offering a daily pay program where the company is funding the advances, it is critical to ensure you are filing daily tax withholdings. The IRS’s policy on this is clear, as is their whistleblower program. In addition, several law firms like this one work with employees who can report their employers’ tax withholding and other violations.

If employers are unable to commit to daily tax withholdings, it is recommended that the employer work with a daily pay provider that funds the advances. DailyPay and PayActiv are two vendors that provide funding for employee advances, instead of the company.

Wage Discounting Violations

Similar to the tax violations, wage deduction violations are also quite serious.  If you plan on offering a daily pay program where the company deducts the amount of advances from employees’ final paycheck, then you should double check that you don’t operate in one of the 13 states where wage discounting is illegal.  If you are not in one of those states, you may still wish to check with your management team to ensure there are no future plans to expand into those states.

Wage discounting is a serious offense, and one that is commonly the target of class action lawsuits or Private Attorney General Actions (PAGA).  According to SHRM, wage discounting violations cost employers billions in fines in 2017.

If you operate in—or ever plan on operating—in one of the prohibited states...

...you should work with a vendor that is 100% compliant in all states. DailyPay and Earnin are two vendors that do not utilize any form of wage discounting in their models.

It is important to consider the above when rolling out a daily payment program—the right program should carefully address the issues outlined above, among others.

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When Offering A Daily Pay Benefit, What Are The Structural Financial Implications?

In considering the financial risks of a daily payment program...

...it is important to take a look at structural and other factors that affect the implementation and rollout of the program.

Here, are a few of the significant elements that you should consider.  

Structural Considerations

A daily payment program can be structured in a few different ways:

Employee-paid

In an employee-paid system, the employee herself takes on the transaction cost of the daily pay program, which can be done in two ways:

  • Transaction Model - The employee pays a fee per use. This enables an employee to directly anticipate costs and use the program only when needed.
  • Subscription Model - The employee pays a fee per month for use of the daily payment program. Though a subscription model may seem efficient at first glance, it may force employees to spend more than they need on the program.

Both models require employees to bear the cost of using the program.

Employer-paid

In an employer-paid model, the employer will bear the cost of the daily payment program. This means that when a daily payment program is integrated into a company’s system, the employer itself will take on whatever payment processing is associated with that program. This can help employees feel the benefit of a daily pay program more directly.

Employee- and Employer-paid

A few daily payment programs enable employees and employers to split the cost of the program between themselves. This allows the utmost flexibility in integrating a daily payment program into an employer’s existing systems. The employer can designate costs they wish to, while covering some of those which will lift a burden off of the employee.