Payroll Compulsory Use for a Beauty School Dropout
Is Vi down at the Frosty Palace requiring her waitresses to establish an account at the local credit union as a condition of employment? It’s not enough that the waitresses are choking from all the hairspray chemicals, cleaning up behind those singing, dancing teenagers, AND making milkshakes… but requiring an account at Grease FCU to receive tips may be a step too far! Although I may not have tips for Vi on how to manage the hairspray or mature teens, I can tell her that she may be violating Regulation E.
You might be more familiar with the Regulation E provision that forbids requiring a member to repay a loan via a preauthorized electronic fund transfer to receive credit in section 1005.10(e). Generally, this means the credit union cannot create a product that forces the member to set up automatic electronic payments to repay the loan. However, the credit union can incentivize members or offer lower rates or fees on loans that have automatic repayment. There is also the compulsory use prohibition protection for government benefits and another often underappreciated prohibition, discussed below. And let’s just say, Vi from Frosty Palace may not be so enthused about this one.
The CFPB just released a new FAQ concerning electronic fund transfers, which tackles the dilemma of mandatory direct deposit account at a particular financial institution within Regulation E:
“Payroll. An employer (including a financial institution) may not require its employees to receive their salary by direct deposit to any particular institution. An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer) or receiving their salary by another means, such as by check or cash.”
The new FAQ states that this prohibition applies to tips. See below:
“6. Does the compulsory use prohibition apply to tips?
Yes.
The compulsory use provision prohibits a “financial institution or other person” from “requir[ing] a consumer to establish an account,” as defined in 12 CFR § 1005.2(b), “as a condition of employment.” 15 U.S.C. § 1693k(2); see also 12 C.F.R. § 1005.10(e)(2). “Account” is defined in 12 C.F.R. § 1005.2(b)(1) as “a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.” Tips can be a significant form of worker compensation, and requirements regarding the method by which workers generally receive their compensation for work constitute “a condition of employment.” Therefore, employers are prohibited by EFTA and Regulation E from requiring workers to establish an account with a particular financial institution to receive tips.
Updated January 15, 2025”
Just to clarify, employers are permitted to require direct deposit as a condition of employment. They just can’t dictate which financial institution a beauty school dropout can receive her tips by direct deposit.
If you have any questions concerning this topic, please contact the America’s Credit Union’s Compliance team at compliance@americascreditunions.org.