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 and wage assignment 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 economy 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 a report 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 and wage assignments. Legal caution is especially appropriate in California.
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).
In California, deductions from final wages are not permissible. And that is so even if the deductions are authorized in advance by the employee! Employers considering on-demand pay must therefore closely analyze the reconciliation process (and whether the reconciliation of wages occurs at the end of a pay period or a later pay period) and build in safeguards as needed.
When advances are provided by a third party, other issues arise. Employers need to think about whether re-payment to a third party is an “assignment” of wages. California’s assignment law (Labor Code § 300(a)) prohibits employers from paying an employee’s wages to a third party, unless permitted by law.
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. In California, an employee cannot assign more than 50 percent of wages at the time of each payment, and an assignment must be memorialized in a duly notarized writing signed by the employee and the employee’s spouse (if applicable). Such detailed regulations make wage assignment laws another important consideration to keep in mind when evaluating on-demand pay programs.
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 and advancements, and transmitting employee data to a third party.
On-demand pay requires an analysis of many state specific laws, some of which are onerous (especially in California). 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.