In 2019, California was the first state to take a swing at explicitly regulating wages-on-demand services. The state senate considered a bill that would provide exemptions to payday lending, money transmission, and financing laws for wages-on-demand providers, but would cap fees and establish requirements related to disclosures, funds delivery, and financial soundness. In a prior client alert, we predicted that other states would jump in on the fun. Last month, New Jersey proved us right with the introduction of SB 866. If California was tipping its toes into the waters of regulation, New Jersey has cannonballed right in to the deep end of the pool.
For those unfamiliar, wages-on-demand services offer workers the ability to access wages for hours they have worked, but which aren’t due to be paid until the end of the payroll cycle. Each service has its own variations, but they generally fall into two broad categories: The direct-to-consumer model and the employer-integrated model. In the direct-to-consumer model, the worker provides wage history and other information directly to the provider and authorizes repayment of the advance from the worker’s bank account. Employers are not involved in direct-to-consumer products, and the advance is funded by the provider. In the employer-integrated model, the employer shares information with the provider and may fund the advance and may assist in recouping the advance through a payroll deduction.
The New Jersey bill sets out to regulate what it calls “earned income access service providers.” The bill would prohibit such providers from entering into contracts with consumers where the advance is repaid directly by the consumer to the provider. The only method of repaying an advance would be through payroll deductions. The bill would also explicitly characterize all earned income access services as loans and all fees and optional contributions as interest. Providers would have to comply with state lending and usury laws as well as the federal Truth in Lending Act (TILA). The provision about complying with TILA is a bit of a head-scratcher since it isn’t clear that TILA would apply to an earned income access product as otherwise permitted by SB 866.
The upshot is that, if passed, the bill would kill the direct-to-consumer model and force the employer-integrated providers to become licensed lenders. Providers that run afoul of the law would be liable for $5,000 for each violation. Wages-on-demand providers (and employers who partner with them) would be well-advised to monitor developments to the New Jersey legislation. We also have a sneaking suspicion that other states may join in on the fun before the end of the legislative session.