Earlier this month, the Maryland Office of Financial Regulation (“OFR”) issued guidance (the “Guidance”) to provide clarity on how the OFR views Earned Wage Access (“EWA”) products and describe the requirements entities offering EWA products must adhere to.
Providing some background for the Guidance, EWA is a financial concept that allows employees to access a portion of their earned but unpaid wages before a regular payday. The practice is intended to offer workers greater flexibility in managing their finances and addressing immediate financial needs. EWA is often facilitated through technology platforms or apps provided by employers or third-party vendors. These products can have associated fees or terms, particularly when an employer uses a third-party vendor to offer EWA services.
If offered directly by the employer, the EWA product is usually paid via a deduction from the employee’s wages in the next paycheck. When a third-party vendor provides the EWA product, it is usually repaid via a direct debit from the employees bank account. EWA products typically come in two different “flavors”: a one-time transaction or a subscription-based product. In a one-time transaction, the advance is provided to the employee on a non-recurring basis. With a subscription-based product, the employee receives an advance on a recurring basis.
The Guidance makes clear that the OFR wants entities to consider the facts and circumstances of any EWA product offering to determine if it is a “loan.” Under Maryland Commercial Law § 12-301, the term “loan” is defined to include “any loan or advance of money or credit [under $25,000] subject to this subtitle regardless of whether the loan or advance of money is or purports to be made under this subtitle.” Maryland Commercial Law § 12-303(a)(3)(iii) goes on to expressly state that Subtitle 3 does not apply “to a loan between an employer and an employee.” Accordingly, employers offering EWA products at no cost to employees do not need to be concerned that their EWA product offerings will be considered “loans” for purposes of Maryland law. Third-party vendors, however, must carefully consider whether their EWA product offerings could be considered “loans.” In making that determination, the OFR instructs third-party vendors to consider the following questions:
- Who bears the economic risk? If the employee defaults on their repayment obligation, does the third-party vendor bear the loss? Or, does the employer bear the loss? If it is the former, the OFR is more likely to consider the third-party vendor to be a “lender” under Maryland law.
- What level of contact does the third-party vendor have with the employee? If the third-party vendor structures its EWA product offering such that it has minimal to no contact with the employee, then the OFR is more likely to view the third-party vendor as a service provider to the employer (i.e., not a lender). The greater the contact that the third-party vendor has with the employee, the more likely it is that the OFR will consider the third-party vendor to be a “lender” under Maryland law.
- Who benefits from any fees or “tips” that the employee pays? The third-party vendor is more likely to be considered a “lender” under Maryland law if it receives “most” of the economic benefit from the transaction, according to the Guidance. To avoid being characterized as a “lender,” third-party vendors should limit its economic benefits from the transaction. If any tips or fees are to be paid by the employee, they should be directed to the employer, rather than the third-party vendor.
Note: Certain tips and/or fees may not be permissible under Maryland law, and any associated tips or fees should be carefully considered before an EWA product is offered to an employee. Some tips and fees can factor into the interest rate on the EWA product, and Maryland places limits on the interest rates that can be applied.
The OFR recognizes that this is a new and evolving product and promises to monitor the use and provision of such products on a going-forward basis. In its oversight of EWA product offerings, the OFR will pay particular attention to: (1) the fees that providers charge employees for the use of the products, and (2) any practices that are deceptive, unfair, or abusive.
Ballard Spahr’s Consumer Financial Services Team is also tracking developments in Maryland’s oversight of EWA product offerings, and we are available to assist any entities that want to take a closer look at how the Guidance impacts their product offerings.