As a relatively new benefit in a rapidly evolving industry, it’s important for employers evaluating potential EWA solutions to consider, at least in part, the regulatory compliance measures that the providers apply to their own businesses.
At the end of the day, you should have confidence in the EWA provider you choose to entrust with your employees’ financial wellness.
Let’s take a look at steps you can use to evaluate providers, and how Rain stacks up with regulatory requirements that affect EWA services.
Rain’s approach combines deep regulatory knowledge with proactive measures to ensure that its EWA program adheres to current laws and industry standards.
Evaluating EWA Providers for Compliance
Background: Different Types of EWA Services Face Certain Regulatory Challenges
First, understanding key aspects of the types of services used by various providers helps in evaluating how a particular provider could be covered by, and can comply with, rules that regulate EWA. The types of EWA services can be summarized as follows:
(1) Payroll Adjustment Model
A payroll adjustment model is built on two separate, but connected, transactions. First, on the employee’s request, the EWA provider initiates the earned wage payment to the employee’s own checking account, as specified by the employee. Typically, the provider makes its payment in exchange for the employee’s assignment of the rights to the earned wages.
Second, the provider presents to the employer the amount of the earned wage payment, and requests that the employer make the payment to the provider–because the provider holds the rights to those funds(due to the first transaction with the employee).
Next, on the pay statement, because the employer has paid the EWA provider for the amount of wages involved in the earned wage payment, the employer adjusts the amount of the employee’s net pay to reflect that payment.
In this Payroll Adjustment Model, any transferred wages and fees usually are reflected in the employee’s pay statement as an after-tax voluntary deduction from earnings. Rain uses the Payroll Adjustment Model.
(2) Payroll “Intercept” Model
In a payroll intercept model, an employer gives the provider control over disbursing payroll to employees on their behalf.
Similar to the Payroll Adjustment Model, on the employee’s request, the EWA provider initiates the earned wage payment to the employee’s own checking account (or potentially to the provider-controlled account or payment card).
In this model, however, the provider will establish shadow FBO (For Benefit Of) accounts for all participating employees to route and intercept their paychecks on payday. The provider recoups their funds plus a fee, and sends the remaining balance to employees’ usual bank accounts.
Participating employees are paid their wages by the EWA provider, and the employees’ pay statements will match the provider’s controlled account, not the employee’s usual bank accounts.
Key Factors to Consider for Each Model
CFPB Advisory Opinion: Characteristics of a Compliant EWA Program
An EWA provider is subject to regulatory requirements that, among other areas, apply to initiating payments to an employee’s bank account and protecting the employee’s financial information. However, there is no specific federal regulation that defines an “earned wage access” or “on-demand pay” product.
Depending on the terms and conditions of a provider’s EWA product, the EWA payment possibly could constitute an extension of credit to the employee that would be regulated under the federal Truth in Lending Act (“TILA”) and the Consumer Financial Protection Bureau’s Regulation Z, which implements the requirements of the TILA.
In 2020, the CFPB issued an “Advisory Opinion” that provides the standards for an EWA provider to not be considered a “creditor,” and for the provider’s payment to not be a “credit” product that is regulated by Regulation Z. If the EWA provider meets all of the requirements for a “Covered EWA Program”—i.e., a program that is exempt from the requirements of Regulation Z—then the EWA provider is not required by Regulation Z to deliver certain types of disclosures when the employee-customer uses the EWA product.
The Advisory Opinion provided several characteristics of a Covered EWA Program that a provider needs to meet so that the EWA provider’s payment to the employee is not a credit product under Regulation Z. Generally speaking, the CFPB’s Advisory Opinion is based on two core standards:
(1). The EWA provider must have a contract in place with the employer to provide the EWA product to the employer’s employees; and
(2). The EWA provider recovers the amounts of the EWA payments due to the provider through “employer-facilitated” transactions.
If a provider operates under “any authorization to transfer funds from [an employee’s] account”for repaying the provider, then the provider does not satisfy that second standard–which means that the payment to the employee is treated as a credit product, instead of a true earned wage payment.
In addition, the CFPB’s Advisory Opinion states:
- The amount of a provider’s EWA payment needs to be computed based on the “‘accrued cash value of wages’” that the employee has earned up to the date and time of the transaction, and the computation must be based on information provided by the employer;
- The provider must provide a free option to the employee to obtain an EWA payment (i.e., the payment may not always be dependent on the payment of a fee) and the provider may not solicit “tips” from the employee;
- If the “employer-facilitated” transaction for payment to the provider is not made, including if the employer becomes bankrupt, the provider has no contractual claim or remedy to recover the payment from the employee;
- The provider may, depending on the circumstances, impose a nominal processing fee, but the Bureau reserves the authority to review the provider’s fee structure to assess compliance with the requirement to offer the EWA payments at no cost;
- The provider must disclose to the employee (such as through the contract) that the provider will not engage in any debt collection, as well as disclosures relating to the requirements summarized above; and
- The provider may not provide its EWA payment to an employee based on the provider’s assessment of the employee’s credit risk (e.g., the provider may not use a credit score).
Bona fide earned wage access products need to operate in a manner that provide employees with access to their own funds, i.e., funds that the employer already is obligated to pay to the employee. Plus, the employee is not obligated to make the repayment to the provider. Any provider that asserts control or management over the employee’s earnings for repayments, including by controlling the flows of funds on behalf of the employee, should be reviewed closely because that approach is not consistent with the standards contained in the Advisory Opinion.
New State Laws: Missouri and Nevada
EWA products and services are emerging as valuable financial products— both to employers and their employees—and Missouri and Nevada have enacted consumer protection laws that expressly regulate EWA providers. This pioneering approach provides a structure so that consumers’ rights are more fully protected, particularly to guard against lenders that are masquerading their loan products as “earned wage access” services.
Classifications of EWA Providers
Missouri’s law (2023 Mo. SB 103) and Nevada’s law (2023 Nev. SB 290) have in common a general requirement: other than certain regulated financial institutions, such as a bank or credit union, any person or entity providing EWA services to residents must be authorized to do so by the state’s financial regulatory agency.
These laws introduce two types of EWA providers that will be supervised by the states’ agencies. One is the “direct-to-consumer” provider, and the other is the “employer-integrated” provider. An entity may seek authorization to operate in both capacities. Regardless of how a provider fits within each state’s framework, only that provider–not the employer–will be subject to oversight.
A “direct-to-consumer” EWA provider delivers EWA services primarily based on earnings data obtained from the consumer. By contrast, an “employer-integrated” EWA provider provides access to the consumer’s “earned but unpaid income” based on employment data obtained, directly or indirectly, from the consumer’s employer. Rain’s EWA services qualify under the “employer- integrated” category.
Core Requirements of New EWA Laws
The newly enacted EWA laws contain several key requirements designed to protect consumers. Among other requirements that apply to a provider are these three main measures:
- Complaints Management: The provider must have policies and procedures to address questions or complaints from consumers.
- Clear Disclosure of Fees: All fees associated with the provider’s EWA services must be disclosed to the consumer.
- Privacy and Data Security: The provider must comply with all local, state, and federal privacy and information security laws.
In addition, these laws prohibit an EWA provider from using a consumer report to determine an employee-consumer’s eligibility for EWA services.
Many, but not all, states have enacted laws that regulate an employer’s use of direct deposit. Most state laws generally require an employer to pay via direct deposit “by deposit of funds in an account in a bank or other financial institution designated by the employee” (Illinois).
The language of these laws—that the financial institution is selected by the employee—suggests that the owner or holder of the account also would be the employee, but notice the silence on that nuance in the Illinois law quoted above.
In California, the state’s agency regulating wage payments has explained that the purpose of that state’s law, which is similar to the Illinois law, is to provide an employee with a “ready and immediate means for an employee to with draw their full wages as cash on the established pay day.”
Other models use of an FBO Routing and Account Number puts the employer at risk of violating these state laws regulating direct deposit because the intercept activities both (i) disable the employee’s opportunity to “withdraw” any wages paid and (ii) lead to delays in settlement at the employee’s real bank account such that the employer is not making its payment on the established pay day.
Rain’s EWA services qualify under the “employer-integrated” category.
Legality of Payroll Deductions
“Illegal payroll deductions” (other terms used are “wage discounting,” “wage assignment,” or “wage deduction”) is a terminology some vendors will often use to divert employers towards their solution.
Rain’s model is an employer-facilitated payroll adjustment model in which an employer performs a paycheck adjustment at the end of a pay period. The payment of earned wages made by the employer to an employee, minus any earned wage payment(s) that Rain provided during that pay period, would not constitute a “withholding”, “deduction”, or “diversion” within the meaning of those laws because:
- No earned wages would have been withheld or diverted from the employee to pay for goods or services
- The employee is in receipt of the full amount of their net amount of wages (e.g. net of insurance premium) on payday.
Rain’s Structure Under Wage Deduction Laws
Many states have enacted wage-deduction statutes designed to bar an employer from making a “deduction” from an employee’s wages—i.e., a diversion of or withholding from wages for the purpose of paying a third party for its goods or services.
Rain’s structure for earned wage payments to an employee does not lead to a“deduction” that is covered under wage-deduction laws. When using the Rain App, an employee obtains an earned wage payment from Rain, and that payment is based on the employee’s actual earnings.
Next, the employer computes the amount to be paid to the employee, and makes an adjustment to the pay owed to the employee in a manner that recognizes the earlier payment by Rain. The employer does not divert wages in a way that is covered by state wage-deduction laws; instead, the employer’s adjustment enables the employer to match its wage payment with the amount of Rain’s earned wage payment so that the employee is paid in full.
Put another way: if the employer does not make the adjustment to its payment, the employee would be paid twice for the same earnings: first by Rain’s earned wage payment and then by the employer’s payment.
Many states have statutes governing “deductions” an employer may make from employees’ wages, but not each state’s wage-deduction statute defines the term “deduction.” Instead, state wage-deduction laws typically take the following form:
Except as otherwise provided, no employer may withhold, deduct or divert any portion of an employee’s wages unless:
- The employer is required or empowered to do so by state or federal law;
- The deductions are for medical care, without financial benefit to the employer;
- The employer has a signed authorization by the employee for deductions for a lawful purpose accruing to the benefit of the employee; or
- The deductions are for contributions to a retirement plan provided by the employer under section 401(k), 403(b), 408, 408A or 457 of the Internal Revenue Code.
This wage-deduction statute does not define “deduct.” The structure of a typical wage-deduction law shows that the purpose is to prohibit an employer from diminishing the amount of the wages under an arrangement that “diverts” funds to a third party for its goods or services.
For example, an employer may not “deduct” or “divert” an employee’s wages to pay an auto body shop for repairing the employee’s vehicle. By contrast, an
employer’s adjustment to a paycheck that accounts for the earned wage payment by Rain does not diminish the total amount paid to an employee because when the amount of the employer’s payment is combined with Rain’s payment, the employee receives wages corresponding to the earnings during the pay period.
In addition, under Rain’s structure, the adjustment made by an employer does result in an action that “withholds” or “diverts” wages for the employer’s own use.
Some states, such as Illinois, Minnesota, and New York, have wage-payment laws that require an employee’s written authorization for deductions. In Minnesota, for example, an employee generally must authorize a deduction from wages after any claimed indebtedness occurred. If the employer’s payment of wages on payday minus any earned wage access payments for that period were to be considered a wage deduction, the employee would need to authorize that deduction after each time the employee received an EWA payment.
However, for the reasons stated above, the payment by the employer to an employee of earned wages, minus any earned wage payment that Rain provided during that pay period, would not constitute a “deduction” regulated under these state laws because no earned wages would have been with held or diverted from the employee for third-party goods or services. The full amount of wages due for the pay period would have been paid to the employee.
Money Transmission License Requirements
Most states have enacted laws that regulate a person that acts as a “money transmitter.” With some exceptions, most of these state money transmitter laws require any provider that inserts itself into the payroll process by moving money from the employer’s payroll account to the employee’s normal bank account is a money transmitter–and must be operating with license in the jurisdiction(s) in which both the employer and employee are located.
When an EWA provider is receiving the employer’s wage payments, via direct deposit, and passing those funds onwards to the employees, operating as a licensed money transmitter is important for providing assurances about the financial stability of that provider. Working with a provider that uses any kind of virtual direct deposit account without a money transmitter license puts the employer at risk because there is not a reliable financial backstop in case the provider experiences an operational or liquidity event that interferes with its processing of payments.
Rain only provides its earned wage payments to employees in one direction: from a Rain-controlled account to the employees’ own normal bank accounts. Rain does not receive funds from its employer-partners to make the employers’ direct deposit payments for them. Thus, Rain does not operate as a money transmitter.
How Rain Stays Current with Legislation
Strategic Compliance Management
In the evolving landscape of Earned Wage Access (EWA), maintaining compliance is paramount for employers. Rain’s approach combines deep regulatory knowledge with proactive measures to ensure that its EWA program adheres to current laws and industry standards. Here’s how Rain delivers strategic compliance management to partner with employers effectively.
Rain’s expertise is defined by practical experience with regulatory bodies such as the CFPB and various state labor departments. Rain leverages strong ties with industry leaders and associations like Mastercard, Visa, APA, and IPA to stay well-informed and effectively advocate for best practices in EWA compliance.
We proactively track both federal and state regulations impacting EWA programs. Our regulatory team ensures that leadership is promptly updated on relevant changes through a systematic regulatory tracker. Any necessary program adjustments are swiftly actioned upon, with oversight from senior leadership and careful implementation by our business stake holders and legal experts.
Rain already is prepared to meet the requirements that will arise under the newly EWA enacted laws. Rain aims to work with the state agencies during the approval processes so that Rain remains in good standing to deliver its EWA program to consumers in these states.
Rain has also gone the extra mile to protect consumer interests. Our company has established disclosures for employee-consumers, particularly for the amount of the fee, if any, that may be imposed for a transaction, and maintains internal procedures that offer substantial protections to consumers.
Dedicated account managers provide direct support and regular business review meetings that include the latest regulatory changes. We take responsibility for informing employer-partners promptly if there is a shift in jurisdictional compliance status, ensuring their EWA program remains within regulatory bounds.