As a convenience to employees, many employers offer payroll advances to their employees to tide them over between paydays. These advances are often somewhat informal, with brief documentation. The U.S. Consumer Financial Protection Bureau (CFPB) has introduced a proposed interpretive rule that would make payroll advances subject to the Truth in Lending Act and other lending regulations.
The CFPB released a report in July 2024 noting that “the number of such transactions nearly doubled between 2021 and 2022, when more than 7 million workers borrowed about $22 billion” and that employees who use such advances “take out an average of 27 such loans a year, and employer-sponsored advances typically carry annual percentage rates of more than 100%.”
Defining payroll advances as loans subject to lending laws would require employers to provide documentation, essentially a lending agreement, for all such loans, including the amount of the loan, specific repayment terms, due dates, payment method such as payroll deduction, interest rates (even if zero), and authorization and acceptance of the terms by the employee. If the employer wishes to recoup any outstanding amount from the employee upon termination, the employer must include that provision in the agreement.
Some lawmakers have objected to the agency’s use of informal interpretive rules and published guidance, rather than the formal legal process that would be subject to review by courts and legislative oversight. At this time, the CFPB guidance is an interpretive rule subject to a public and notice comment period but is expected to be finalized after the public comment period ends on August 30, 2024.
Ivy N. Voss is an attorney for Employers Council.