Proposed regulations threaten on-demand pay benefits in California

Regulations that squelch job growth are not in the state’s best interests.

One new benefit California employers are using to attract workers is something called Earned Wage Access (EWA). EWA—also known as on-demand pay—gives employees access to their earned wages before a traditional, scheduled payday.

Many on-demand pay platforms link into an employer’s payroll system. Workers can log in and see how much pay they have accrued. If a worker needs money to pay for an unexpected cost, they can tap into their wages ahead of payday. Most on-demand pay providers offer next-day deposits for free. Instant access typically comes with a small ATM-like fee.

Employees have reported using on-demand pay for a variety of reasons. Testimonials have highlighted how access to earned wages can help workers pay bills on time without incurring late fees, or pick up new prescriptions, or help manage the many unforeseen costs that come with raising kids.

Employers that offer the benefit include major national retail chains like the Kroger family of grocery stores, as well as hospitality and healthcare leaders like Los Angeles-based Behavior Frontiers. This last company took the initiative to offer earned wage access benefits in 2022 to boost employees’ financial health and mental wellness.

Research shows on-demand pay benefits both employers and employees. One 2022 study by payroll provider ADP found 96 percent of employers who offer on-demand pay had an easier time attracting talent. In another study, 95 percent of employees with access to on-demand pay stopped or reduced use of payday loans.

As on-demand pay has grown in popularity, so too has government interest in regulating the product. Proposed regulations in California carry major consequences. In May of 2023, the state’s Department of Financial Protection and Innovation (DFPI) began the process of drafting rules to regulate on-demand pay in the state.

For California employers and workers, DFPI’s proposed regulations are bad news, as they would treat earned wage access as a loan. If enacted, the regulations would take a simple benefit with transparent, low fees and turn it into a complex lending product.

Shoe-horning an innovative benefit like on-demand pay into California’s legacy credit regulations does not make sense. This classification would hurt consumers by encouraging new terms, fees, and penalties. It would also make the benefit more complex and less attractive for employers to offer.

The Los Angeles County Business Federation “BizFed,” an advocacy alliance that unites 240 diverse business organizations representing 420,000 employers with 5 million employees in Southern California, urged state regulators to modify their proposal. BizFed supports DFPI’s attempt to put safeguards around on-demand pay but believe a product shown to help both employers and workers deserves tailored regulations.

The good news is that DFPI has options at its disposal. The on-demand pay industry has proposed a common-sense compromise that allows employers to continue offering the benefit without a lending classification. This solution, which also guarantees clear fee disclosures and bans interest, late fees and debt collections, keeps things simple for both consumers and businesses.

DFPI is expected to finalize its on-demand pay rules soon. California employers and employees who have come to rely on on-demand pay are counting on regulators to acknowledge the negative consequences of treating the product as a loan.

Regulations that squelch job growth are not in the state’s best interests. DFPI must pivot to a plan that accommodates earned wage access benefits. If the department is not capable of mapping out a more productive path, employers and employees are depending on Gov. Gavin Newsom and the Legislature to step in with solutions.

Tracy Hernandez is Founding CEO of the Los Angeles County Business Federation, widely known as “BizFed.”