The Star-Ledger

Why Should NJ Workers Pay To Get Their Own Pay? | Opinion

The Star-Ledger — Februrary 16, 2021

By Beverly Brown Ruggia and Mary Pat Gallagher
Star-Ledger Guest Columnists

A bill is working its way through the New Jersey legislature that will open the door to a new form of payday lending. Unless dramatically revised, A-3450, which passed the Assembly on January 15, would allow payroll advance companies to operate in the state by circumventing state consumer laws. The bill could also undermine an ongoing investigation into the industry by the New Jersey Department of Banking and Insurance.

While solutions are needed for people struggling financially from the economic fallout of the pandemic, spending next week's paycheck today is not a solution. Early wage access industry practices can leave workers repeatedly borrowing against their earned wages, trapping them in a cycle of debt. Without strong safeguards in place, early wage access is potentially as harmful as payday lending.

Payroll advance companies enter contracts with employers or directly with workers to advance wages ahead of the regular payday. Sound familiar? These advances are typically repaid via payroll deductions or through direct withdrawal from the individual's bank account. Generally, some form of fee is charged for the advance. Regardless of how small, the fees amount to interest payments on what are, in effect, loans, even though the industry insists that they are not. People who take out payday loans also have earned wages coming to them. Given the short term for repayment, the fees can add up to a shockingly high APR. A $100 advance taken five days before payday with a $5 fee or "tip" is equivalent to a 365% annual rate, far more than New Jersey's 30% usury cap.

Although some direct-to-consumer arrangements collect fees in the form of "voluntary tips," A-3450 has no safeguards that would prevent companies from pushing customers to tip or penalizing those who do not tip, or "tip" too little. In addition, advances that are repaid via direct withdrawal (including some employer-based programs) can result in costly overdraft fees.

It is deeply troubling that A-3450 has no fee limits and exempts these loans from the state's usury cap, which by design prohibits payday lending.

As with payday loans, early wage access is marketed as a one-time solution for a temporary cash shortfall or unexpected expense. While some companies limit the number of advances per pay period, others allow them daily, and nearly all result in chronic reborrowing. Employees can end up short each payday and taking back-to-back advances until, just as with payday loans, they find themselves trapped in an endless cycle of debt. The National Consumer Law Center (NCLC) has estimated that users average 12 to 120 advances per year, and many take out even more.

Concern over early wage access industry practices extends beyond consumer advocates. In August 2019, New York's Department of Financial Services announced a multi-state investigation into allegations of illegal online lending, unlawful interest rates disguised as tips, monthly memberships and other fees. The New Jersey Department of Banking and Insurance is part of that ongoing investigation.

If the intention is to help workers, early wage access should be a benefit, free to employees. Current technologies allow employers to pay wages early, but workers should not pay to get paid. Better yet, employers could help eliminate the need for advances by paying a living wage so employees are less likely to have to scramble to survive between paychecks, or employers could facilitate and support employee savings incentives and emergency fund programs.

We urge the Legislature to await the results of the regulatory inquiry rather than permitting business practices that could soon be revealed as predatory, abusive, and/or illegal under existing law. If, after the investigation concludes, lawmakers choose to authorize early wage access in New Jersey, we urge them to take the inquiry findings into consideration and build on S-866, the original Senate bill, to ensure vital consumer protections.

If there is anything we have learned from the pandemic, it is that our social and economic safety nets are full of holes. We must not let quick and deceptive fixes tear through strong consumer laws and create more holes through which New Jerseyans will fall into greater economic hardship.

Beverly Brown Ruggia is the director of financial justice programs for New Jersey Citizen Action.

Mary Pat Gallagher is a communications and policy analyst for New Jersey Appleseed.

Top Top | NJCA in the News | NJCA Homepage