By Tom Scanlon
General Counsel and Chief Compliance Officer
Payroll Compliance and Earned Wage Access: Employer’s Pitfalls Embedded in DailyPay’s Payment Structure
HR professionals know that maintaining reliable direct deposit systems for their employees depends on adhering to the employer’s well-established protocols or its payroll systems. Direct deposit of an employee’s paycheck seems simple: the funds should just arrive in the employee’s checking account on the scheduled payday. But that apparent simplicity depends on the real work and experience of an HR pro, who is involved during each pay period so that the employer’s standards for processing payroll payments can continue to operate effectively. Some earned wage access providers use payment structures that do not reflect any care for the employer’s own standards for processing payments to employees. Instead of enabling the employer to carry out its usual business, some EWA providers require employees to hijack the employer’s standard forms so that the EWA provider is paid first (before the employee!)—and eventually the net (net) wages that “are supposed to” be paid to the employee wind up in a checking account that the employee really can use.
This post focuses on the risks that the employer bears when selecting an EWA provider, such as DailyPay, which puts a premium on its own needs for repayment —and subordinates the employer’s interests of meeting its compliance obligations under state wage-payment laws.
Rain’s Employer Payroll Model recognizes that the employer should not be put at risk by using an EWA solution that forces significant changes for routing direct deposits for those employees who sign up for the EWA provider’s account. When an employer selects Rain, the employer keeps its existing forms and procedures for making direct deposits of net wages to employees. The result? The employer continues to operate its own systems for direct deposit, as usual—built around years of experience and careful coordination with payroll services providers—and bears no incremental risk under state laws regulating those payments of net wages.
Employers Know How to Route Direct Deposits—and Rain Respects Their Systems
An employer’s standard payroll process for direct deposit typically is developed and improved upon over time, and in cooperation with its bank, its payroll services provider, and other experts. HR pros recognize that state and federal laws generally require net wages owed to an employee to be credited to the employee’s checking account at the financial institution designated by that employee. Departures from the employer’s routine process introduce risks to the employer—including risks of violating state wage payment laws regulating direct deposits.
Some EWA providers don’t care about the forms and processes that the employer already has in place for making direct deposits of net wages. Rain is not among them. Instead, Rain’s Employer Payroll Model is built around Rain’s deference to its employer-partner: all of the employer’s existing forms and procedures for initiating direct deposits of net wages remain intact so that each employee continues to be paid on time, and to the checking account of their choice.
DailyPay’s Intercept Model Hijacks an Employer’s Direct Deposit System
Tucked away in the fine print of DailyPay’s system for routing EWA payments is a set of requirements imposed on each employee that disrupt the employer’s well-established protocols for making direct deposits of earned wages.
Before an employee is allowed to obtain EWA services from DailyPay, the employee must agree, as part of the contract with DailyPay, to obtain a “DailyPay Routing and Account Number” (sic). Section 2 of DailyPay’s contract explains that the employee must have the “DailyPay Routing and Account Number(s) from us [i.e., DailyPay] for an account that we establish for your participation in the DailyPay Program.”
Notice who’s doing the banking in this EWA scheme: that’s DailyPay “establish[ing]” its own account for itself so that the employee can “participat[e] in the DailyPay Program.”
After the employee banks with DailyPay’s Routing and Account Number(s), DailyPay’s contract stipulates that DailyPay—not the employee—has the right to modify the employer’s records for routing the direct deposit of the employee’s net wages. Here’s how DailyPay describes that process: “You [i.e., the employee] agree to make direct deposit arrangements with the Hiring Entity using your DailyPay Routing and Account Number as the account of record in the Hiring Entity’s payment system. You agree to instruct the Hiring Entity to direct all of your net pay to that account, and you authorize us [i.e., DailyPay] to convey such instructions to the Hiring Entity on your behalf.”
The objective of this scheme is plain: By mandating that the employee authorize DailyPay to communicate with the employer the instructions to route the direct deposit of net wages to the “DailyPay Routing and Account Number,” DailyPay fixes to pay itself first, prior to the employee’s own receipt of their hard-earned wages. Payment to the employee is supposed to arrive, eventually, in a “linked bank account,” but only after DailyPay has satisfied itself regarding the debt incurred by the employee for DailyPay’s EWA services.
The Employer (not DailyPay) Bears Risks of Violating Wage Payment Laws When Using DailyPay’s Intercept Model
Some employers apparently have found that DailyPay’s intercept model could be attractive because the mechanism that DailyPay uses for its repayments appears to involve a “hands free” approach for the employer. From the employer’s perspective, the main actions for payments to DailyPay involve the mere substitution of the DailyPay Routing and Account Number(s) for the employee’s designated checking account in the employer’s record for processing direct deposit. Years of experience, well-settled forms, and standard protocols that the HR pros have designed for securely making direct deposits to employees are cast aside so that DailyPay’s two-cycle scheme can operate.
Imagine that an employee walks into the HR pro’s office and says: “Here’s the voided check for my uncle’s checking account. Please re-configure your records with the company’s payroll processor so that the direct deposit of my net wages are paid to my uncle’s account. Then I’ll pick up my money from him.”
The HR pro would laugh—and then cry. Why? Because if the employer really were to make direct deposit payments to an account held by a person who is not the employee who earned the wages, that practice would violate state laws regulating direct deposits. The employer—not the self-interested EWA provider—bears the risks of liability under state laws for making direct deposits of net wages to its employees.
Virginia law provides a prime example of the type of state law regulating direct deposits. Under Virginia Code Section § 40.1-29(B):
“Payment of wages or salaries shall be (i) in lawful money of the United States, (ii) by check payable at face value upon demand in lawful money of the United States, (iii) by electronic automated fund transfer in lawful money of the United States into an account in the name of the employee at a financial institution designated by the employee, or (iv) by credit to a prepaid debit card or card account from which the employee is able to withdraw or transfer funds with full written disclosure by the employer of any applicable fees and affirmative consent thereto by the employee.” (Emphases added.)
The law in New Jersey likewise requires an employer to initiate a direct deposit payment to a bank account that the employee herself owns so that “[t]he employee’s wages [which are] deposited shall be subject to withdrawal and other disposition by the employee to the same extent and in the same manner as if such deposit had been made directly by the employee” who deposits a physical check in the employee’s account with her bank. See N.J.A.C. § 12:55-2.4(h) (Time and mode of payment).
Moreover, the protocols that an employer has developed, such as keeping the record of the employee’s consent to direct deposit of wages, are overturned in DailyPay’s intercept model. If the funds that the employer pays out for the employee’s net wages are not deposited in the employee’s own checking account so that the employee can pay their bills, the employer bears the risks of noncompliance with these state labor laws. DailyPay does not bear those risks.
And DailyPay doesn’t incur the costs associated with mistakes that arise with the employee’s “linked bank account” that is supposed to be maintained by the employee in DailyPay’s system. In its standard contract, DailyPay explains to its employee-customer: “We are not liable for any of [the] adverse impacts” that the employee may suffer if the employee’s “linked bank account or linked debit card information changes.”
To summarize, when choosing an EWA provider like DailyPay, it's vital to assess the potential risks that could undermine compliance with state wage-payment laws. Rain's Employer Payroll Model emphasizes the need to protect the employer from undue risk, especially in altering direct deposit procedures for EWA users. Balancing employer and employee interests should be a top priority in this decision-making process.
Tom Scanlon works as General Counsel and Chief Compliance Officer for Rain Technologies Inc.
Tom advises the company on its contracts with employee-customers and its employer-partners, as well as the company’s arrangements with service providers, for Rain’s earned-wage access services. Tom also is responsible for counseling Rain on compliance with federal and state laws regulating consumer financial products and services.
Prior to joining Rain, Tom was a partner with Dorsey & Whitney LLP, and advised banks, fintech companies, and other clients on banking activities, payments systems, and matters involving consumer financial products and services. At the start of his career in Washington, D.C., Tom served at the Federal Reserve Board, and worked on rules for payments activities, financial privacy, data security, and consumer reporting activities. From 2009 to 2015, Tom served at the Department of the Treasury, and worked as the principal attorney of the Department’s team to help draft the Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Act). Tom has experience with a range of financial services laws, including anti-money laundering laws, the Electronic Fund Transfer Act, and the Military Lending Act. Tom received his J.D. from the University of California, Berkeley School of Law, and his M.A. and B.A. from the University of California, San Diego.