By Ryan Ashton
In this third blog post in our four part series, we look at some key compliance considerations you should keep in mind when building out your earned wage access program in 2023. You can also read part 1 and part 2.
But before we dive into some of the details, it’s first important to set the stage for some context.
The earned wage access space is relatively new. And as such, each vendor offering earned wage access services does so differently. While there’s been some convergence toward a more employee and employer centric approach to delivering wages on-demand, there’s still a great degree of difference between providers.
All that said – in our analysis, there are three primary methods for delivering earned wage access: the deduction model, the wage assignment (or intercept) model, and what we’re calling the ‘responsible’ model.
As you’re evaluating your plans for earned wage access this year, keep the summary of these three models below in mind:
Deduction Model
The Deduction Model of on-demand pay requires the employer to make payroll deductions in order to recover the earned wage advance. This use of payroll deduction is restricted in more than 14 states, thus exposing the employer to risk associated with state labor regulations. Because it changes the date that an employee has constructive receipt of wages, this model also creates tax withholding and reporting issues for the employer.
Wage Assignment or Intercept Model
The Wage Assignment Model of delivering on-demand pay requires participating employees to reroute the direct deposit of their wages to the earned wage access vendor, using the vendor’s pooled account, where wages are held. Because this process requires the employee to give control of all of their wages to the provider, it creates significant risk for workers. For this reason, wage assignment programs are prohibited or significantly restricted in multiple states, including Illinois, Maryland, New Jersey, New York, and Virginia. This model may also require the provider to obtain a money transmitter license in each state in which it operates.
Responsible Model
The Responsible Model of delivering on-demand pay, pioneered by Instant Financial, is the only solution that protects the employer from risk and does not require it to implement payroll deductions or other process changes. The Instant Financial model gives the employee full control over how and when they receive their pay. Workers can access their earned pay when they choose and are never charged a fee for the service.
If you need a more comprehensive look at the earned wage access buying process, we’ve developed this 2023 Earned Wage Access Buyers Guide to help make the decision-making process a little easier.
You can download it here, or visit our website at instant.co to learn more about Instant’s comprehensive suite of fee-free on-demand pay solutions.
