Moves in at least two states requiring payroll processors to be licensed as "money transmitters" have the industry fearing a potentially expensive and disruptive new regulatory hurdle.
Last month, the Independent Payroll Providers Association (IPPA) notified its members that it was monitoring developments in Texas and Connecticut. Payroll processors in those states -- including at least one administrative services organization (ASO) -- have been notified that they are subject to licensing requirements for businesses that engage in what the Texas Finance Code refers to as "the receipt of money or monetary value by any means in exchange for a promise to make the money or monetary value available at a later time or location.”
According to IPPA, Texas’ code defines money transmission as "receiving compensation or expecting to receive compensation, directly or indirectly for conducting money transmission.” IPPA also reports the Texas Banking Commissioner has "issued Consent Orders and imposed fines against several payroll processors who impound client funds.” In September last year, payroll processor Paychex was ordered by the Texas Department of Banking to pay a $212,500 penalty and fulfill the requirements to obtain a Texas money transmitter license.
Industry Caught Off Guard by Recent Regulatory Actions
The actions by officials in those states, along with rumblings of potentially similar enforcement actions in other states including Arizona, Utah, Colorado, and Alabama, caught the industry by surprise. Payroll processors have not historically been included in the categories of business subject to money transmitter licensing requirements – and were specifically exempted from MTL regulations in at least a half dozen states, including California. Banks and post offices are also exempt.
The regulations are designed to help protect against fraud, and can vary from state to state, but compliance can be expensive and time consuming, with initial costs of up to $1,000,000 and annual costs of $300,000 to $500,000 for licensure in all U.S. states and territories.
Avoiding a Possible Trigger for Money Transmitter Licensing Requirements
While the IPPA is recommending that its members consult with their own legal counsel to determine how money transmitter regulations apply in the states they do business in, some industry insiders are focused on language in the Texas consent orders around the "settling of funds in your account."
If that is the trigger for the licensing requirement, payroll processors whose payroll funds do not "settle" in their own accounts may fall outside the definition of a "money transmitter" subject to the licensing requirements.
At Cachet, we remain exempt under the exemption held by our bank, according to two informal opinions we have received. Our ACH payroll clients who do not "settle funds" in their own accounts, like Quantum users, may also fall outside any licensing requirements pegged to whether or not clients funds are held in their own accounts. Quantum users process payroll without payroll funds ever passing through their accounts.
Our sister company, Payroll Tax Management, also offers more robust options to mitigate the licensing requirements.
California Regulators Expected to Propose New Regulations
Earlier this year California regulators began soliciting comments on a proposed regulation related to its "agent of payee" exemption to the state's Money Transmitter Act, which creates an exemption around payment processing conducted under a written contract in certain circumstances.
In the meantime, at least one payroll processor cited by Texas is exploring a partnership with Cachet as a hedge against the licensing requirements and we are continuing to explore the options for our clients.
At Cachet Financial Services, we are part of a family of companies dedicated to providing solutions across the landscape of compensation issues. Our ACH payroll process is secure, reliable, cost-effective and compliant. We have a long history of taking on burdens that free our clients to focus on their businesses. If licensing trends have you worried about the state of your payroll business, give us a call or click on the link below and let us help you determine the options that may be available to you.