[co-author: Andrew Ignacio*
On June 15, 2023, Nevada Governor Joe Lombardo signed SB 290, which requires early wage access (EWA) providers to obtain a license from the Commissioner of Financial Institutions. This is the first EWA law enacted by any state.
Early Wage Access Generally
EWA grants workers immediate access to wages they have already earned before their regular payday. This allows for a more flexible cashflow for the employee in between pay cycles. Granting workers access to their wages when they need it can provide them more control over their money, which allows them to better respond to unexpected expenses.
EWA can also benefit the employer. Implementing EWA programs can improve employee retention because it allows employees to meet financial needs in between paydays without imposing substantial burdens on the employer. EWA can easily be integrated with an employer’s payroll provider without interfering with an already-existing pay schedule.
The popularity and adoption of EWA programs have seen rapid growth over the past several years and is expected to continue on this trajectory. Consequently, several states have draft bills that seek to regulate the EWA market. With Nevada being the first state to pass an EWA bill, it seems likely that other states will soon follow suit.
Nevada’s SB 290
Under SB 290, an EWA provider will be required to obtain a license from the Commissioner of Financial Institutions via an application. Such oversight is designed to provide users of EWA services a greater sense of security.
Applicants will be subjected to background checks, disclosure of leadership or shareholder status, financial histories, among other types of information. If an applicant is approved, the EWA provider will be subject to several consumer-friendly requirements. For example, EWA providers will be required to provide clearly at least one option for a user to obtain their wages at no cost. SB 290 also prohibits EWA providers from running background checks to determine eligibility, charging fees for failure to pay outstanding proceeds, and charging cancellation fees.
The bill recognizes two categories of EWA services. First is the “direct-to-consumer” service where the provider delivers unpaid wages based on data received from a non-employer source. Second is the “employer-integrated” service which is based on data from the employer or the employer’s payroll service provider.
Notably, SB 290 does not recognize EWA providers as lenders. The bill states that the services offered by a licensed provider will not be considered a loan or subject to any laws governing loans. This is an area where states may differ as they draft EWA bills and regulations. One such state is California. In March 2023, the California Department of Financial Protection and Innovation proposed regulations that would consider EWA advancements as loans between employer and employee..
Tax Implications
What has yet to be determined are the potential tax obligations under the constructive receipt doctrine. Under this doctrine, receipt of income occurs when a taxpayer obtains income that is not physically in their possession but has been credited to their account and over which they have immediate control. Since the taxpayer has a right to such income, they are deemed to have received it even if they did not elect to take such income. States may attempt to dodge the issue entirely by classifying EWA as a loan between employers and employees. Others may impose limits on how much an employee can withdraw using an EWA program. Nonetheless, it is unclear as to whether either will satisfy the constructive receipt doctrine at the federal level. The IRS requires employers to withhold taxes and make payments a few days after a payday. Thus, if wages obtained through the EWA satisfy the doctrine, it can be argued that employees have daily access to their wages which may require the employer to make their payments to the IRS on a more frequent basis. Since Nevada does not have a state income tax, it is not an issue at the state level under SB 290, but likely will need to be resolved at some point in the future.
In March 2023, the U.S. Department of the Treasury released the General Explanations of the Administration’s FY 2024 Revenue Proposals. There, the Department proposed amending section 3401(b) of the Internal Revenue Code to provide that the payroll for EWA arrangements is treated as a weekly payroll period. This may require an employer participating in an EWA program to withhold employment taxes from the paycheck of an EWA employee on a weekly basis.
While Congress has yet to enact proposed amendments to the Code, employers should be certain they are in compliance with current tax laws. The Department has made statements that all employers that offer EWA programs should be currently maintaining either a daily or a miscellaneous payroll period. Additionally, employers are responsible for withholding and paying employment taxes on employees’ earned wages on a daily basis. Failure to comply may result in civil and criminal penalties.
Looking Forward
Most provisions in SB 290 will take effect on July 1, 2024. Any provider who was engaged in EWA business in Nevada as of January 1, 2023, will be allowed to continue such business without a license until December 31, 2024, so long as they submit an application before January 1, 2024.
As of this writing, other states that have recently considered EWA bills include California, Georgia, Kansas, Mississippi, Missouri, New York, North Carolina, Texas, Vermont, and Virginia. Since the IRS has yet to define on-demand payment, we recommend that employers that are either already engaged in EWA services or are considering EWA services to seek guidance at the state level, especially in states that are considering EWA bills.
* summer associate in Littler’s San Francisco office.
