Early Wage Applications Aim to Disrupt Payday Loans, Two Week Cycle

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Human resources managers at G4S, a global security company that employs guards in office and residential buildings, recently noticed a disturbing trend.

Up to 72 percent of the company’s U.S. hourly workers quit their jobs each year. The company launched an employee survey to find out why so many people were heading for the exit.

The guards overwhelmingly responded that they were struggling to make ends meet.

“Not only were salaries problematic, so was the two-week payroll cycle,” said Geoff Gerks, director of human resources.

G4S has therefore joined a growing group of companies, such as Walmart inc., Taco Bell, The Kroger Company., and Boston Market Corp., which offer their employees the ability to access at least some of their paychecks before the traditional two-week period. Gerks says the move, and a push to raise wages for security workers in new contracts, was an “easy decision” in a “tough job market that is very, very competitive.”

As the job market tightens, businesses, especially in low-wage industries, are looking for new ways to attract and retain employees. This has created opportunities for Silicon Valley tech startups offering app-based prepayment services to alleviate some of the pain of workers living paycheck to paycheck.

“These funds are for work that they have already done and that they can use to navigate life’s unexpected events,” said Wal-Mart spokeswoman Michelle Malashock. The company has partnered with two prepayment providers, Even and PayActiv. “When our associates are more financially secure, they are better able to do their jobs. “

The rise in prepayment options follows similar moves from concert companies such as Uber and Lyft, which allow drivers to cash in several times a day. It could challenge the traditional payroll cycle and help people avoid high interest loans and credit card bills.

But some fear the prepayment providers may be sheepskin payday lenders. Accelerating pay cycles could mask a bigger problem: wage stagnation.

“Smoothing out the availability of wages over a pay period is beneficial for people with very little savings,” Chris Tilly, labor economist at the University of California, Los Angeles, told Bloomberg Law. “What he doesn’t address is why these people have very little savings in the first place. Low pay is low pay, and this is intensified by the increase in housing, health care and other costs in many places. “

Meanwhile, prepayment companies are trying to navigate a legal and regulatory minefield. This includes banking, tax, and employment issues that some states, including California, where many prepayment providers are based, and New York City, are just starting to address. These states could be the first to regulate a burgeoning industry that has yet to gain the attention of Congress and federal agencies.

“Major life change”

There are two models of prepayment providers. Some, like DailyPay and PayActiv, are teaming up with companies to offer employees payday advances in exchange for a monthly or per-transaction fee. The third-party provider handles the money (it does not transfer money from the user’s employer) and then collects the users’ money either directly from their next paychecks or via a debit from the bank account on the day. payroll. Some companies subsidize a portion of the costs, but in many cases employees must pay transaction or membership fees.

Others, like Earnin, Dave, and Brigit, provide services directly to end users. These providers collect the advanced funds directly from the user’s bank accounts on a fixed date.

Some providers have added a source of revenue by partnering with prepaid card services. Dave and PayActiv offer reloadable Visa cards on which users can get early transfers.

According to Malashock, some 350,000 Walmart employees use the Even app to manage their finances or get paid up front. The app has completed more than 5 million transactions totaling $ 900 million since the Walmart program launched in December 2017.

Prepayment services are similar to setting up an ATM in an office lobby, says Jason Lee, co-founder of DailyPay. The company has partnered with G4S, Westgate Resorts, Kroger, Staffing Adecco, and others in exchange for a fee of $ 1.99 to $ 2.99 per transaction.

“The thesis here is that when employees can access wages when they want to, it creates a major life change,” says Lee. “If they can access the money whenever they want, they can also press a button and then pay their bills on time. Because this is a benefit attributed to the employer, the employee now stays longer.

DailyPay currently has around 500,000 users, who complete 1.2 transactions per week. Users earn around $ 66 in first salaries per transaction, most of which comes at the end of the month. This means that the average user spends a maximum of $ 3.60 per week on prepayment charges.

The major players in the early compensation market have largely targeted low-wage industries. Lee of DailyPay and Jon Schlossberg, CEO of Even, say they see the market moving towards white-collar workers as well.

“To pretend that we are going to magically solve this problem by simply increasing wages is exaggerating the impact of the wage increase,” Schlossberg says. “Many people living from paycheck to paycheck are already earning more than the median income. “

Nearly 40% of Americans don’t have $ 400 in their bank account, according to a 2019 Federal Reserve study. This forces them to turn to credit cards and payday loans which often come with high interest rates. For payday loans, the repayment cost is often three times the amount borrowed or more, despite federal and state efforts to cap rates.

But some worry that increasing pay dates won’t solve the problem of why people live paycheck to paycheck in the first place.

Hitting these workers with new fees for accessing their money sooner could make matters worse, says Rachel Schneider, resident of the Aspen Institute’s Financial Security Program.

State laws were enacted to require employers to pay their workers regularly, but partnering with prepayment providers doesn’t cost many of them a dime, Schneider says. Because advance payment providers pay the money to users and then take it back directly, employers can continue to process payroll over the two-week cycle without losing interest on the money they pay workers or without losing interest on the money they pay workers. assume new fiscal and accounting burdens.

“It’s not a golden rule to pay every two weeks,” says Schneider. “It’s just that employers would otherwise be happy to delay paying their workers. “

Regulation playing field

California lawmakers are tinkering with legislation that would set some ground rules for prepayment providers.

A bill passed by the state Senate in May would cap prepayment transaction fees at $ 14 per month and limit those transactions to three per pay period and 50 percent of a worker’s unpaid earnings. The measure, backed by PayActiv and other prepayment providers, would also prevent these businesses from being regulated like credit services.

“The Senate bill favors the industry by not allowing it to be treated like a financial institution,” Pedro Ibarra, former COO of PayActiv, told Bloomberg Law. Ibarra recently sued PayActiv, alleging he was fired after reporting the company.

Ibarra questioned PayActiv’s practice of allowing users to get cash advances that they have not yet earned, according to the lawsuit. He said this made PayActiv a traditional lender, subject to federal and state restrictions and required to disclose the fees as interest charges.

“It has the potential to create an ecosystem of users who are trapped in there because they keep withdrawing money that they have to pay back later,” Ibarra said.

PayActiv’s chief operating officer, Ijaz Anwar, called the lawsuit “false and unfounded,” in a statement provided to Bloomberg Law.

“In some cases (less than 5%), an employee may spread the payroll adjustment over two pay periods,” Anwar said. “This option is in place to give users more control over their finances. For example, if a user has an emergency that requires a $ 400 transaction during one pay period, the ability to designate a $ 200 adjustment over two pay periods helps them better manage their cash flow and avoid more expensive alternatives such as late fees or overdraft fees. . When this happens, the user’s ability to access wages earned in the next pay period is reduced by $ 200 to ensure that paycheck safeguards remain in place.

The company, which says it processed more than $ 1 billion in advance wages for some 650,000 users, has yet to respond to the lawsuit, which was filed July 2 in Santa Clara County Superior Court. in California.

In March, the New York City Department of Financial Services reportedly subpoenaed another prepayment provider, Earnin, seeking information on the company’s business model. Earnin does not partner with employers to offer its services and collects the money directly from users’ bank accounts. The company charges a suggested “tip” of up to $ 14 per transaction.

The DFS declined to comment and Earnin did not respond to requests for comment.

Laws in California, New York, and a handful of other states strictly limit the deductions that can be made directly from workers’ pay checks. Prepayment providers in these states circumvent these limits by forcing users to sign agreements that allow them to automatically debit fronted funds from their bank accounts on payday.

The services are also designed to avoid tax implications for employers. By transferring the money to a user, instead of transferring it from the user’s employer, the payments are not considered a “constructive receipt” of wages under federal and state tax laws. This means that the employer does not have to immediately withhold income tax or impose Social Security and other employment obligations on Uncle Sam.

In other words, transactions are tailored so that they don’t disrupt the traditional two-week payroll cycle.

“The payroll will not change,” says Lee of DailyPay. “The company still manages payroll every two weeks, but the employee has access to payroll whenever they want.”

—With help from Lydia Beyoud.

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