What’s wrong with Pay on Demand?
There were at least 11 pay-as-you-go providers at the American Pay Annual congress of the association last month, not counting the national third payroll providers. Nothing wrong with vendors showcasing their products at a Pay professionals. But if you only listened to the hype, you’d think pay-as-you-go was the best thing since sliced bread. We had a very different feeling chatting with our table mates over lunch one day during Congress – no one wanted to deal with it.
Pay-as-you-go is marketed to employees who live paycheck to paycheck and run out of money before the next payday, giving rise to the usurious payday loan industry. It’s also marketed to millennials, who grew up expecting anything on demand. It’s supposed to fill the void and get rid of payday loans by allowing employees to access a portion of their salary before payday.
The perceived defect: Unless pay on demand is capped at a low amount, employees may have the same problem as with payday lenders – a constant need to get paid early to make up for their shortened paychecks. And capping at a low amount would seem to defeat the purpose of on-demand pay. These were real concerns for our dining companions. Pay on demand is probably coming your way. How to evaluate pay-per-view providers?
Unfortunately, you are operating in a regulatory vacuum.
What regulatory agencies say
The only federal agency to process payment on demand is the Consumer Financial Protection Bureau. It released two documents in late 2020, both of which concluded that pay-as-you-go was not an extension of credit under Regulation Zwhich is the Truth in Lending Regulations (the Federal Reserve names its regulations with letters):
- A advisory opinion published in the Federal Register outlining the features that a pay-on-demand product must have to ensure that it does not extend credit under Reg. Z: The supplier contracts with employees; employees cannot access more than their earned salary; employees only pay a small fee for the service; employers do payroll deductions and remit the amount to the seller; the seller cannot sue defaulting employees; and the supplier does not check the creditworthiness of employees.
- A approval order for a pay-as-you-go provider that meets the advisory opinion criteria.
The IRS has yet to provide guidance on the most sensitive issue for Pay— if employees who can access part of their salary on demand implicitly receive all of their salary, thereby triggering your withholding obligation. However, a proposal in the administration’s 2023 budget covers pay-as-you-go. Under the proposal, employees who can access their compensation on demand may be in constant constructive receipt and, therefore, taxable on their wages as they are earned.
The proposal would require employers offering on-demand pay arrangements to maintain either a daily schedule or a miscellaneous schedule pay period and withhold and pay social charges on wages earned by employees on a daily basis. These conditions would likely dampen employers’ enthusiasm for offering a pay-as-you-go benefit.
Even if these provisions do not survive the budget process, it gives the IRS an avenue to issue guidelines.
5 questions to ask sellers
Before signaling your approval of C-suite’s plans to roll out a pay-as-you-go benefit, make sure they’re very sure of what they’re signing. They (or you) should demand answers to these questions:
- How is the program structured? You want to know if the provider controls employee direct deposit accounts or how the program integrates with employee direct deposit or charge card accounts, what the nominal fee is, and who sets the cap on the amount employees can to access.
- What is the additional charge for the Pay department? You need to be crystal clear with the C-suite about the additional work (daily reports of hours worked to vendor, remittances to vendor) and the additional expense this will entail.
- How does pay-as-you-go affect holdback? You need to make sure that employees’ taxes are withheld and that enough is left over to be able to withhold their benefits contributions and honor garnishments.
- What impact does pay-as-you-go have on state wage law compliance? State wage laws run the gamut, from specifying what deductions you can make from employees’ pay to what information you must include on their pay stubs. Some states prohibit employees from voluntarily assigning their wages to a third party.
- What about privacy and data security? You protect employee names, social security numbers, and financial information. You also need to make sure the provider does this.