This is the third in our five-part Q&A series addressing your questions from our recent seminar with the APA. These questions center around how a daily pay benefit fits into legal, tax and compliance guidelines.
1) How does the DailyPay model not trip constructive receipt in the same way that deduction and employer models would?
Because there is no change to the timing of payroll funds, there is no triggering of constructive receipt or change to the timing of tax withholding.
DailyPay uses a proprietary “Full Net-Pay” (FNP) funding model. The FNP funding model is the backbone of DailyPay’s product and differentiates DailyPay from any other provider in the marketplace. It is what ensures that the employer has no changes to its payroll process. Here’s how it works:
- DailyPay funds all payments requested by the user over the course of the pay period (“transfer”).
- Prior to the employer’s regularly scheduled payday (1 day prior), DailyPay also funds any amount of the employee’s net pay that hasn’t already been requested by the team member (“remainder”). There is no transaction fee charged for this process.
- On payday, the employer remits payroll to all employees’ direct deposit instructions on file. For those employees using DailyPay, their direct deposit instructions are their DailyPay Account, so 100% of their net pay is deposited into that DailyPay Account. That is how DailyPay is repaid. As you can see, your payroll team does not have to process a wage deduction, or have the vendor debit team members’ accounts to collect funds for any amounts received by a team member prior to payday.
DailyPay’s business model ensures compliant recordkeeping and requires no changes to the company pay stub. Pay stubs need to show 100% of the net pay owed to the employee in order to codify compliance with wage & hour regulations and as an affirmative defense against wage theft class action, and DailyPay advances do not qualify as constructive receipt.
Under both the deductions model and the company-funded model, the pay stub will codify that the company has sent an amount less than 100% of the net pay owed to the employee. The pay stub for advance amounts will be missing and the company lacks a record of having remitted 100% of the pay.
The deductions model comes with the additional complication of relying upon a third party to validate receipt of the funds. For example, if any potential wage theft litigation were brought against the company, under the deductions model, you would require the vendor’s participation to validate that each payment was made in an equivalent amount to the deduction codified on the pay stub.
The company-funded model also comes with the complication that every advance constitutes a constructive receipt of wages and therefore would require a pay stub for wage & hour compliance as well as filing of tax withholdings.
2) So how do you get around the federal and state laws that say you have to tax an employee based on the date the funds are made available to them? Don’t you have to pay tax liabilities based on the “advance” date?
Payments funded by DailyPay do not trigger constructive receipt, as explained above, so those laws do not apply. DailyPay has received a tax opinion from the leading payroll tax compliance expert, Mary Hevener, who is a partner at Morgan Lewis.
3) Are you saying the “constructive receipt” is the pay stub?
No. Constructive receipt is a law regarding tax payments, and in the DailyPay model it is only triggered when an employee receives their regularly scheduled paycheck. Since DailyPay pre-funds all employee transfers, that is the only time the employer is legally making a payment to the employee.
4) In regards to providing pay stub compliance, if an on-demand pay advance is only given for a portion of the paycheck and that amount is deducted on the next payroll, then doesn’t that meet compliance?
If your vendor is processing advances using wage deductions, just be mindful that there are state-by-state wage and hour laws that you’ll want to ensure your legal team is comfortable with. DailyPay does not give legal advice, but we use the Full Net-Pay (“FNP”) funding model in order to avoid having your payroll team process a wage deduction.
5) Can you explain why the state of New York is investigating on-demand pay?
The New York Department of Financial Services (NYDFS) is investigating illegal online lending, unlawful interest rates disguised as tips, monthly memberships and other unexpected fees in an effort to protect cash-strapped customers. Because DailyPay’s main concern is to help workers avoid payday loans and hidden fees, which often trap workers in a cycle of debt, we are supportive of this investigation. Many of the companies under investigation are actually neo-payday lenders, not reputable daily pay benefit providers, and we feel that this investigation will help make that distinction more clear, both in the market and to consumers.
6) Do you see states requiring on-demand pay?
On-demand pay is a benefit that helps workers pay their bills on time and take the first step toward financial wellness. While these are great benefits, we do not anticipate states requiring on-demand pay at this time.
7) What happens to an employee’s W-2 when they take an advance on December 28th for time to be paid in January? IRS says constructive receipt is when pay is received.
As explained above, transfers funded by DailyPay do not trigger constructive receipt. If an employee made a transfer on December 28th from a paycheck they normally would have received in January, their W-2 for the past year would still be correct. Constructive receipt would not be triggered until January when pay is received by the DPA. The paycheck, including the advanced amount, would be factored into the total salary paid on their W-2 for the next year, since that was the scheduled payday.
8) Is DailyPay compliant in California? There are many very strict employment laws there.
Yes, DailyPay is fully compliant in all 50 US states, including California.
9) If DailyPay handles all of the employee transfers, then who pays the taxes and issues the W-2s for those payouts?
Transactions between DailyPay and your employees are independent of the payroll process. With DailyPay, there is no change to your company’s payroll process, and that includes tax withholdings. DailyPay funds all advances and, therefore, there is no change to when your company runs and funds payroll or the related tax withholding filing. Employers issue W-2s to their employees who are enrolled in DailyPay at the same time and through the same process as all other employees.
10) Does DailyPay require that employees sign an acknowledgement of the small usage fees they are responsible for?
Yes. By using the DailyPay Program, users agree to our Program Terms and the DailyPay Site Terms. Our Program Terms clearly outline the transaction fees, which are also highly visible on the app. Currently, the fees are $2.99 for a same-day transfer and $1.99 for a next-day transfer. To initiate a transfer (and incur a fee), employees are also prompted to confirm once again that they understand they will pay a fee.
11) How does on-demand pay impact escheatment (unclaimed payroll)?
By law, employers must pay their workers. If an employee is paid via paper check, and they do not receive their last check after termination, it is considered unclaimed property and the employer must find the employee to ensure they receive the check. Any enrolled DailyPay users would be able to access those funds from their DailyPay app once the administrative error on the employer’s end was rectified.