Earned Wage Access (EWA), also called on-demand pay or real-time payroll, is an exciting new employee benefit and payroll technology. Historically, payroll is run infrequently by employers because it is costly and time-consuming. As a result, 2 in 3 workers are paid just once or twice a month by their employers.

A new technology was developed over the past few years to upend this status quo. By integrating an employer’s timeclock, accounting and payroll systems, EWA companies can simulate and facilitate the calculation and payment of net earned pay for an employer’s workforce.

The result is a seamless, verified environment with a simple process:

1. Employee works a shift, and the shift is recorded in the employer’s time management system
2. The shift data is turned into “net” or “take-home” pay by translating shift data into gross earnings, then adjusting for withholdings, elections, garnishments and the like.
3. Employees can see, in real time, their “earned wage balance” growing
4. With the touch of a button, if desired, an employee can receive their own earned income for less than the cost of an average out of network ATM fee. If used in a given pay period, the employee seamlessly gets the rest of their pay automatically on payday, otherwise they are just paid in normal course.

The process sounds simple right? That’s because the employer is involved. The timeclock shift data is verified. The gross pay rate is verified. The accounting elections and “take home pay” are both verified. Garnishment or child support orders are confirmed. All these elements are critical to the process.

In fact, the legal analysis regarding the regulatory classification of the service hinges on whether or not the pay is earned. If funds provided represent net take-home pay, much like accessing equity in your insurance policy, the transaction is not credit. After all, you earn money as you perform work, not when you are paid. If that is not self-evident, just reflect on the termination pay obligation of an employer; even if an employee quits or is fired mid-pay cycle, of course she is entitled to her earned pay. Nobody disputes that. And in fact, some states mandate that in these situations she must be paid her net wage balance immediately.

The line between earned and unearned pay is not prediction or prognostication. It is knowable and binary. Either wages are earned or they aren’t.

As such, the Consumer Financial Protection Bureau (CFPB) in its late 2020 EWA advisory opinion pointed out critical workflow elements of any Earned Wage Access program. Indeed, the first 2 factors of its multi-factor analysis were 1) whether the vendor has a contractual relationship with the employer and 2) whether it uses employer data to determine (and limit amounts provided) net take-home pay.

Satisfying this framework is critical to the analysis. Noting this enticing safe harbor from lending laws, other fintech neo-payday lenders have sought to “jump on” the EWA bandwagon, so to speak, to make more space out of the regulatory lane legitimate, employer-based EWA vendors have successfully carved out.

The problem is, the legal analysis doesn’t hold together when the employer is not at the table. Money provided without the employer’s involvement is fundamentally an advance or a loan. Further, that critical line, between earned and unearned pay, simply cannot be verified in an environment without the employer’s data. And lastly, without payroll integration, the fundamental nature of the product is giving someone money through the internet, and getting repaid later from their bank account, which looks an awful lot like a loan as well.

All of this is to say that direct-to-consumer (D2C) Earned Wage Access isn’t legally earned wage access at all. After all, how can you have earned wages without the wages?

Frankly, the entire Earned Wage Access moniker is legally nonsensical in a D2C context:

1. Earned: without employer data, it is unknown what is earned vs unearned.
2. Wages: without the employer, there simply are no wages involved.
3. Access: without wages, what are people even accessing? Credit?

Without the employer at the table, you simply (and legally) can’t have true Earned Wage Access. And that is why all available or pending safe harbors regarding this new and exciting space focus on legitimate, employer-based providers.