By Pamela Vartabedian and Noah Finkel
Seyfarth Synopsis: Employers are starting to consider “on demand” pay for employees. Before considering whether to implement an “on demand” pay program, employers should consider laws on wage deduction, wage assignment, and wage statements, as well as the administrative support needed for such a program.
Instant gratification is a fact of daily life, and there is no denying we have come to expect it. When we pay bills, we go online instead of to the post office. When we need a ride, we tap a button on our phones. When we watch movies, we go online instead of to a video store. This expectation has infiltrated our daily lives and, now, it has shown itself in the workplace.
Some gig companies offer “on demand” pay through a variety of technology solutions. To stay competitive, other employers are considering flexible pay structures for their own employees. But because the law treats contractors differently than employees, it is important to think through the various laws that may come into play, and to consider the administrative burdens these programs create. Below we describe some common on-demand pay programs and some key issues to consider when analyzing whether to implement on-demand pay for employees.
What is On-Demand Pay?
“On demand” pay refers to programs or “technology solutions” that allow employees to “withdraw” wages that they have already earned for work performed in a pay period before their regular pay date.
How Does On-Demand Pay Work?
On-demand pay programs come in various forms. Two main variations are (1) internal advancements directly from the employer to an employee and (2) advancements from a third party to an employee.
Under the first variation, an employer advances an employee’s wages upon request by the employee. At the end of the pay period, the amount advanced during the pay period is reconciled against the employee’s pay and the employee receives the balance of the net wages.
Under the second variation, a third party advances an employee’s wages upon request by the employee (after receiving information regarding hours worked from the employer). At the end of the pay period, the employer pays the employee the balance of net wages owed and pays the third party the amount previously advanced to the employee.
In addition to the above variations, some third parties have come up with creative accounting arrangements to avoid direct repayment from the employer to the third party.
In analyzing on-demand pay programs, employers should consider not only the administrative costs but the laws governing wage deductions, wage assignments, and wage statements. The laws are different depending on the state you’re in.
Wage Deduction and Wage Assignment Laws
Many states require employee authorization for deductions from pay in connection with advances or overpayments. Because of these requirements, employers should consider whether and when internal advances amount to “deductions” from wages that are subject to state law restrictions. This is an important consideration for employers with employees in many states, as wage deduction laws vary from state to state, and employers need to understand the wage deduction authorization requirements for each state (for example, in some states, a blanket authorization at the time of hire is permissible, while in other states it is not). When advances are provided by a third party (as opposed to internally), other issues may arise. Employers need to think about whether re-payment to a third party is an “assignment” of wages. Similar to wage deduction laws, wage assignment laws are complex and state-specific. Some states significantly limit how much money an employee can assign to a third party, or require specific authorizations. For example, in California, a wage assignment must be memorialized in writing signed by the employee and the employee’s spouse, and notarized. In New York, a wage assignment must be memorialized in a signed writing and, among other things, filed with the county clerk. Such detailed regulations make wage assignment laws another important consideration to keep in mind when evaluating on-demand pay programs.
Wage Statement Compliance
An open question in some states is whether each advance payment would need to be accompanied by a wage statement. If this were to be required, there are additional practical challenges to consider. It may not always possible, for example, to allocate the proper amount of taxes and benefits deductions each day—these amounts depend on the total actual wages per pay period. Similarly, in a fluctuation work week situation under the FLSA, the overtime rate is not determined until the end of the workweek (because the overtime rate is based on the amount of hours worked in a week). Wage statement laws are therefore another important consideration.
Employers should also consider the administrative burdens that on-demand pay programs entail. These burdens can include such annoyances as obtaining required authorizations from employees; ensuring compliance with various state laws regarding deductions, advancements, and wage statements; and transmitting employee data to a third party.
On-demand pay requires an analysis of many state specific laws, some of which are onerous. Employers should also consider the administrative support needed to employ such a program safely and should weigh the benefits of such a program against the burdens imposed. We are here to help you if you have any questions or need assistance analyzing a specific program.