Are Earned Wage Access Fees a Burden to Workers?

Earned wage access (EWA), also known as on-demand pay, came on the scene in 2015, and it quickly rose in popularity, particularly in companies that employed a large frontline or hourly worker population. Instead of having to resort to overdrafts, late fees or predatory payday loans, workers living paycheck to paycheck now had a way to access their earned pay whenever they needed it to help pay bills or meet emergency expenses.

The apps have surged in popularity over the past decade, fueled by a competitive labor market, a pandemic that found frontline workers in high demand, and consumer expectations of instant access. Employer-partnered EWA providers sent over 83 million payments to employees in 2022, according to a recent study by the Consumer Financial Protection Bureau (CFPB).

EWA apps, argue some consumer advocates and regulators, are really payday loans with a new name, and they can trigger a cycle of debt that looks strangely like payday loans. According to the Associated Press, EWA users typically earn less than $50,000 a year, and some on-demand apps charge hefty fees or “tips” for access to earned wages.

In fact, some EWA providers change monthly subscription fees or require users to pay “tips” to access their earned pay. The Center for Responsible Learning reports that the average APR for a repaid payroll advance in 7 to 14 days was 367%, almost the same as a typical payday loan APR (400%). 

Let’s say a worker pays a fee of $2.99 to access an instant EWA transfer. If they request that transfer daily, that’s $15.00 a week or $60-$75 each month. Annually, that’s $780 – more than a week’s pay – if a worker makes $15/hour! The apps that ask users to pay “tips” carry even higher fees. 

The California Department of Financial Protection and Innovation found that employees who use tip-based EWA apps withdraw 6% to 50% of their paycheck 36 times a year, with an average “tip” of $4.09. Their report also cited the fact that the average APR for three tip-based fee structure companies was 334%!

The Lure of EWA? Fast Cash with No Impact on Credit

EWA was initially meant to solve a short-term cash deficit by allowing employees to withdraw some of their earned income to pay a bill on time and avoid a late fee or overdraft. It provides a means to handle situations where bill due dates and paycheck dates aren’t in sync. By borrowing from their earned wages, users pay less for EWA than a bank overdraft charge that can be as high as $39. 

EWA gives hourly workers a means to quickly receive a portion of their earned wages without applying for a loan or impacting their credit. Unfortunately, there is a drawback. According to the Center for Responsible Lending, those who use EWA apps have experienced a 56% increase in checking account overdrafts, the very thing EWA was designed to prevent!

Regulation Is Right Around the Corner

With the steadily increasing number of workers using this benefit and the number of providers offering EWA using different models and payments for using the service, it seems inevitable that industry regulation will follow. After all, it is the regulators’ job to ensure consumer protection at all costs. 

Several states, including Connecticut, California, and Hawaii, are attempting to regulate EWA by setting limits on the fees that EWA providers can charge workers who use the apps. However, the EWA industry favors a federal bill before Congress to exclude these apps from regulation by the Truth in Lending Act.

It’s the regulators’ job to protect consumers and their money, a task that falls under the purview of the CFPB. That’s why, on July 18, 2024, the CFPB proposed a landmark interpretive rule that could significantly impact the administration of employer-offered EWA and on-demand pay. The CFPB stated that paycheck advance products available to employees by vendors and providers are loans, which creates significant implications for both employees and employers if and when the final guidance becomes law. 

Because EWA providers allow employees to access their pay for either a set fee or “tip,” the CFPB states that this practice makes an EWA advance a loan, subject to the provisions of the Truth in Lending Act of 1968. In the proposed interpretive rule, it’s evident that the CFPB strongly prefers a “zero-fee” approach to employer-offered earned wage access, whereby employees don’t pay any fees to access their earned pay. Some EWA providers already offer free options, but that’s not enough to satisfy the CFPB, which wants zero fees across the board with all EWA offerings. 

Whether or not the CFPB interpretive rule becomes law, it’s clear that we’re heading in the direction of zero-fee EWA in the not-too-distant future.