PAYDAY.

• Author: Arbel, Yonathan A.
• Position: Legal remedies and reform

ABSTRACT

Legislation lags behind technology all too often. While trillions of dollars are exchanged in online transactions--safely, cheaply, and instantaneously--workers still must wait two weeks to a month to receive payments from their employers. In the modern economy, workers are effectively lending money to their employers, as they wait for earned wages to be paid.

The same worker who taps a credit card to pay for groceries in semi-automated checkout lines depends on dated payroll systems that only transfer payments on a "payday. " Workers, especially those living paycheck-to-paycheck, are hard-pressed to meet their daily needs and turn to expensive, short-term credit products--notably, payday lenders. While the need for credit is a real one, credit providers charge a steep price, often culminating in endless debt spirals. So, why does the payday still exist?

This Article studies various explanations--economic, historical, behavioral, and legal. A primary conclusion is that the payday owes its existence to legacy legal architecture. That is, payday is a software problem, not a hardware problem. The hardware--i.e., money and payroll technology--is here. We can pay workers daily; in fact, gig economy workers in developing countries will often be paid more quickly than an American employee for the same work. What holds us back is our legal software: dated Eisenhower-era legislation that failed to anticipate technological change. Surprisingly, even pro-worker legislation, such as minimum wage laws, inadvertently encourages the practice.

By revealing the overlooked and dated legal infrastructure that sustains the payday, this Article suggests a path for legal reform. Daily streams of payment to workers are feasible, practical, and far more efficient than most people realize. A focused reform could effectively bring an end to the puzzling and pernicious practice of having workers lend money to their employers while they wait for their payday.

INTRODUCTION I. THE PAYDAY PUZZLE A. The Two Employment Contracts B. The Puzzle of [K.sub.2] II. PAYDAY: HISTORICAL, LEGAL, SOCIAL, AND ECONOMIC EXPLANATIONS A. Path-Dependence B. The Synchronization of Bills and the Payday C. Employer Power and Lack of Sophistication D. Collateral E. Behavioral Biases F. Legislation G. Check Cutting Costs III. ABOLISHING THE PAYDAY A. The Stakes of Abolishing the Payday B. Alternatives to Abolition IV. A WORLD WITHOUT THE PAYDAY A. Changing by Information B. Changing by Leading C. Fixing Employment Law D. Improving Money Technology V. THE DAY AFTER PAYDAY: CONCLUDING THOUGHTS INTRODUCTION

Legislation often lags behind technology. As Guido Calabresi observed, "laws are governing us that would not and could not be enacted today." (1) This failure is resounding in the context of employment contracts. Payment technology has made incredible advances, and today trillions of dollars are traded in the online economy, moving between parties almost instantaneously. (2) At the same time, workers still wait for weeks until a formal "payday" to receive their hard-earned wages. While workers sell their labor today, employers only pay them in the future, leveraging wages as another line of credit.

We seem to take the payday's existence for granted, (3) but it exacts a heavy price. Workers who wait for payment need to support themselves; the vicissitudes of everyday life--a sudden toothache, a flat tire, a stain on their only clean work shirt--demand money, now. (4) With many workers living paycheck-to-paycheck, (5) the current payday system pushes them to payday lenders and other short-term credit providers that dot the modern urban landscape. (6) A payday loan is meant to help the worker bridge the gap until payday, but it involves interest rates that are on average twenty times higher than those of credit cards. (7) A $300 loan can quickly balloon into thousands of dollars of outstanding debt, leading many borrowers to debt spirals that can culminate in deep financial distress and even bankruptcy. (8)

This Article begins by framing the payday in the context of the employment contract. The employment relationship is, at its core, an exchange of money for labor. (9) The payday also injects into this relationship a credit transaction, one where the employee is lending money to the employer. But this is a credit transaction that is completely artificial from the viewpoint of financial theory. Put simply, workers should not be in the business of lending money to their employers. (10) Not only do workers lack capital or comparative specialization in lending, but they are also badly positioned to deal with counterparty risk. (11) A value-creating credit transaction moves money from those who have it to those who need it, not from the Walmart employee to Walmart.

If the payday does not serve a clear financial purpose, what might explain its dogged persistence? This Article evaluates a variety of reasons: economic, sociological, historical, legislative, and even psychological. The primary conclusion is that the payday is a software problem, not a hardware problem. The hardware of the economy, both money and payroll technologies, has greatly advanced over the last century, allowing us to quickly and cheaply pay for both goods and services. To wit, a freelancer doing work in India for an American employer as part of the gig economy, who performs the same work as an American employee, will often be paid faster than the American counterpart. (12) What hinders progress is our legal software: (13) Eisenhower-era legislation that failed to keep pace with modern technology. In fact, as this Article reveals, the culprit is often pro-worker legislation, which stands in the way of progress, sometimes actively encouraging longer pay periods. (14)

This Article's central message is that abolishing the payday is desirable, efficient, and surprisingly feasible. To move to a system of daily pay, two challenges of legal origin must be overcome: compliance costs and payment costs. To assure compliance with legal norms, employers must verify payments--and doing so daily can be expensive. Transferring money to employees is also costly, given the sizable minority of workers who are unbanked and underbanked. (15) How can we offer payments at scale without compromising compliance costs or burdening workers with check-cashing costs?

To address these issues and others, the proposed framework offers to decouple compliance from pay. (16) Every day, workers are to receive roughly 93% of their daily pay, leaving some slack until a biweekly "accounting day." (17) On accounting day, the employer verifies compliance and makes true-up adjustments as needed. To address issues of money transfer, which are of particular concern for the unbanked and the underbanked, I explore the increasing use of digital money and payroll cards. This Article concludes that moving to daily streams of payment is both feasible and desirable, although it contemplates a transition period. By abolishing payday, we can spare employees the indignities of the payday, increase consumer liquidity, enhance worker autonomy, reduce the size of the payday lending industry, and improve the American economy as a whole. (18)

This Article highlights the importance of regularly updating our legal software. Payday legislation started as a mode of progressive reform towards the end of the nineteenth century. Overcoming initial resistance from legislators and courts, payday laws were passed to discourage the predatory behavior of companies, which were lending to their employees at usurious rates. Remarkably, despite the poor money and payroll technologies that existed at the time, the legislation was effective, and for a short period of time, workers were paid weekly. By an ironic twist of fate, it is possibly the rise of the welfare state that led to the move from weekly to the much slower biweekly pay. (19) The birth of the welfare state was spurred by the introduction of social security and social security taxes. The administrative burden occasioned by various related laws, such as the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Fair Labor Standards Act (FLSA), and tax withholdings made frequent pay more difficult. Thus, the same laws that were meant to protect employees ended up harming them in an unanticipated way: by depressing the frequency of pay, they increased the need for expensive short-term credit solutions.

This Article unfolds in four Parts. Part I sets the stage by explaining the tenuous relationship between employment contracts and the payday. Part II explores a variety of reasons for the existence of the payday and evaluates whether any counsels in favor of keeping this practice. Part III explains why the payday should be abolished and Part IV explains how this could be achieved in practice.

To understand why the payday exists, Part I covers the basic theory of employment contracts. It explains why the payday is not a natural part of employment contracts and why, from a finance perspective, it is an artificial and inefficient credit transaction.

If financial logic does not explain the existence of payday, what does? Part II explores a variety of potential reasons and justifications--historical, legal, economic, psychological, and sociological. Special attention is given to a psychological attempt to justify the payday: the idea that the payday helps employees overcome some of the behavioral challenges of saving and budgeting their own money. (20) Refuting this idea is important because some might worry that moving to daily streams of payment would lead to profligacy among employees. To this end, I present empirical evidence that frequent pay does not increase spending. In fact, there is some reason to worry that infrequent pay may result in excessive spending, because of the higher availability of cash on hand. Most important, however, is the argument that...