On November 30, 2020, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion regarding certain types of earned wage access (EWA) providers. In the document, the CFPB also provided an opinion on a legally ambiguous form of earned wage access that requires an employee to repay advances from a vendor.
What is an Advisory Opinion?
Typically, an advisory opinion is issued at the request of a single entity (or group) in response to regulatory uncertainty regarding that entity or group’s offering and specific set of facts. An advisory opinion is made specifically in response to a request for this type of clarity. As such, this type of letter reflects specific feedback around a particular set of facts that an at-risk entity or group seeks answers around. It is a response to a specific inquiry, does not apply to any other facts or circumstances, and is not a conclusive federal legal ruling.
Specifically, there is a difference between a CFPB advisory opinion and a CFPB rule. A CFPB rule reflects a specific administrative guideline promulgated by the CFPB and holds legal significance. It becomes a part of the Code of Federal Regulations, like all other administrative rules and regulations. A CFPB advisory opinion only resolves administrative uncertainty to one specific entity (or group), as described above. It only applies to those facts and circumstances, and has no other official legal significance. It does not become a part of the Code of Federal Regulations.
How Does the Opinion Apply to DailyPay?
The CFPB opinion does not apply to or impact DailyPay’s model, as DailyPay does not require any form of employee payback. As such, it does not require DailyPay, or any of its employer partners, to make any changes in response to the opinion. The opinion does not provide an “approved” or “endorsed” model. Its sole purpose is to clarify a legally questionable model used by some providers in the marketplace, solely from a federal consumer finance perspective.
Background on two different EWA models
By way of background, there are two types of on-demand pay models. The difference between the two is the presence or absence of an employee-directed payback, i.e., an employee obligation to repay.
Specifically:
- Employee Payback Model: In this model, the on-demand pay provider makes an advance to an employee, and the employee then pays back the provider on payday in one of two ways:
- Via a debit of the employee’s personal bank account on payday
- Via an employee-authorized payroll deduction (also known as a wage deduction)
- Non-Payback Model: In this model, the on-demand pay provider makes a payment to the employee’s designated direct deposit account. The employee never pays the provider back in this model. DailyPay follows this model.
Employee Payback Models are particularly vulnerable to being seen as credit transactions. The CFPB Advisory Opinion created a narrowly tailored exception for these models only if they meet specified restrictive criteria.
What Does this Advisory Opinion Cover?
In the opinion, the CFPB indicates that programs which require an employee to pay back an on-demand transfer via a payroll deduction and charge fees may be considered extensions of credit. The CFPB has noted that there is no extension of credit in the case of wage deductions only if there are no fees or other restrictions. As noted, DailyPay’s proprietary technology and use of the Non-Payback Model do not and have never relied on employee payback of funds via a payroll deduction or debiting of bank accounts (the CFPB’s analysis only clarifies information around these models — our model is and has always been in full compliance).
What Does this Advisory Opinion Not Cover?
Importantly, the CFPB opinion does not resolve existing legal prohibitions at the federal level for debiting models, or the state level for deduction models. This does not eliminate core compliance, tax, additional workflow implications by payroll deductions themselves (and, importantly, the fact that laws in a number of states expressly restrict wage deductions). Regarding state-level prohibitions on deduction models, employers are still at risk of violating Department of Labor wage and hour statutes or other labor rules.
DailyPay is the gold-standard on-demand pay provider and does not rely on any form of employee payback or payroll deduction. Please feel free to contact publicaffairs@dailypay.com should you have any questions.
Note: This article is for general information only. It is not a full analysis of the matters presented. The information reflects the view of DailyPay, should be considered marketing material and should not be relied on for legal, tax, accounting or regulatory advice.
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