PayActiv
Safwan Shah, PayActiv's founder and CEO.
- A former employee is suing the financial-services startup PayActiv, alleging racial discrimination and harassment, disability discrimination, and shady business practices.
- PayActiv, which has raised some $40 million from firms like SoftBank and Generation Partners, counts Goodwill and Walmart among its customers.
- The former employee, Pedro Ibarra, said that leading up to the November 2016 presidential election he faced racism and harassment from management.
- He also said PayActiv's app, which allows users to access earned income before payday, puts people in a "cycle of debt" and should be subject to lending regulations.
- Ibarra said he was dismissed from his job while he was on medical leave and five days after he sent a letter about his concerns about the app.
- PayActiv's chief operating officer, Ijaz Anwar, described the lawsuit as "spurious and without merit."
- Visit Business Insider's homepage for more stories.
A former employee is suing the financial-services startup PayActiv, alleging racism, harassment, and disability discrimination, and that the startup was misleading about its core product in a way that could be harmful to consumers.
PayActiv, a company in San Jose, California, that works with customers like Goodwill and Walmart, allows employees to access part of their wages before payday. It's backed and has raised $41.05 million from investors including SoftBank Capital and Generation Partners.
It says on its website that it "was founded to level the playing field for the millions of lower-income hourly workers being exploited and monetized for their 'between paychecks' cashflow timing issues."
Pedro Ibarra, who was PayActiv's director of operations, said in his lawsuit that he was terminated five days after sending an email to the leadership team raising his concerns about PayActiv's business model - specifically, that PayActiv was not being honest about its product, did not comply with regulations, and did not properly encrypt sensitive financial data.
He also alleged that he was let go while he was on medical leave stemming from the pressure of dealing with his experiences at the company.
"It was very high stress, mostly because of the way we were operating," Ibarra told Business Insider. "I knew there was something wrong with the business model. I brought it up to the executives. I brought it up to the founders on numerous occasions. I felt like what I was telling them was falling on deaf ears."
PayActiv's chief operating officer, Ijaz Anwar, described the lawsuit as "spurious and without merit."
"We will not comment further on pending litigation but will remain focused on our mission to bring financial security, dignity, and savings to the millions of Americans experiencing financial stress," Anwar said in a statement.
'They do not value or see us as equal'
Ibarra, who is Mexican-American, said that in the two months leading up to the November 2016 election, other employees would make jokes and derogatory comments about Latinos coming across the border and about building a wall.
Ibarra said in the filing that PayActiv CEO Safwan Shah told him that "he and his people" better not vote for Donald Trump or else they were "going to get deported."
Ibarra said that when Trump was elected, he received a text from Anwar: "Mexicans sold out. You lost the Alamo - again."
Ibarra said in the filing that after the election he "was subjected to intensified harassment" - for example, he said that colleagues frequently used phrases like "bad hombre" and slurs like "beaner" around him and in reference to him.
He said that members of PayActiv's management also made comments such as "No wall can stop you guys" and "If Trump builds the border wall, who is going to pick the fields?"
Ibarra alleged that despite his title, skills, and work, he was not paid as much as his non-Hispanic coworkers, that the company discriminated against Latinos and African-Americans in hiring for top-level positions, and that leadership roles were occupied exclusively by people of Pakistani descent.
Ibarra said that he complained about the harassment to management and brought up PayActiv's hiring practices to Shah but that the company did not take action.
"I was the only director that was Hispanic," Ibarra said. "They do not value or see us as equal. In my opinion, I believe they did not want someone with my background or ethnicity managing or holding a high position at the company."
PayActiv did not comment specifically on these allegations.
A 'cycle of debt'
Ibarra's lawsuit also makes allegations about PayActiv's business practices - mainly that it's not transparent with users about how the service works.
PayActiv's core product is a service that helps companies like Walmart offer their employees the ability to access a portion of the money that they've earned at any time, even before payday. For example, workers who experience an emergency or an unexpected bill while they're between paychecks might use this service. There's a small fee involved, though PayActiv says many employers subsidize that charge.
"No interest is ever charged, and this fee is significantly less than the costs of a payday loan, overdraft fee or typical late fee," Anwar said in the statement.
The cash is paid out against an employee's earnings and thus isn't technically a loan but rather a cash advance. PayActiv gives users the option to pay it back over two pay periods.
Ibarra argued in the complaint that by the time that second pay period rolls around it's tantamount to credit, because it effectively has to be paid back by hours the employee hasn't worked yet. For employees in industries like retail, where hours can vary between pay periods, there's no guarantee that they will make enough to pay it back.
Ibarra said that this is misleading to users and that the company is creating a "cycle of debt." He argued in the complaint that PayActiv should be subject to the strict financial regulations around organizations that lend credit - and that it should either stop offering repayment over two pay periods or else be more transparent.
"By being transparent, you have to comply with federal and state credit-lending laws," Ibarra told Business Insider. "You can't just disregard lending laws because you're a startup or offering earned wages."
Ibarra also criticized PayActiv's support of California Senate Bill 472, sponsored by Democratic state Sen. Anna Caballero, that would draw a strict legal distinction between access to earned income and credit while also preventing companies like PayActiv from charging users certain fees. Ibarra told Business Insider he thinks this bill would effectively shield PayActiv from certain credit regulations.
In his statement, Anwar disputed the notion that the service is in the business of credit and said it supported the bill because it "adds consumer protections and clarity to a complicated but much needed industry."
"PayActiv works directly with employers to offer on-demand access to earned wages. PayActiv is not a loan, but rather functions like a membership program," Anwar said.
Read the full complaint here:
Read PayActiv's full statement here:
PayActiv is aware of the lawsuit filed by a former employee. We believe the lawsuit is spurious and without merit. We will not comment further on pending litigation but will remain focused on our mission to bring financial security, dignity, and savings to the millions of Americans experiencing financial stress.
Regarding our business model and data security, PayActiv employs the highest standards of data security, including SOC 1, SOC 2, PCI and ISO27001. Exchanged data is encrypted and stored in a secure manner. Data is only shared with third-party vendors for payment processing for the services we provide for earned wage access. We will never sell user data, or give data to third-parties for marketing purposes. This is done via a contract between users and PayActiv. These vendors also comply with the highest level of information security standards.
PayActiv works directly with employers to offer on-demand access to earned wages. PayActiv is not a loan, but rather functions like a membership program. Users pay $5 per biweekly pay period or $3 per weekly pay period to access earned wages and other wellness related services. They can access their pay multiple times with a cap of 50% of their earned income or $500, which ensures they will always receive a paycheck. No interest is ever charged, and this fee is significantly less than the costs of a payday loan, overdraft fee or typical late fee. There is no charge if wages are not accessed and many employers subsidize the charge. Users also receive access to a number of financial wellness related services like Uber, Amazon, direct bill pay and budgeting and savings tools. There is never any underwriting or recourse for funds accessed.
PayActiv is a sponsor and supporter of Senate Bill 472. This legislation includes responsible guardrails to protect consumers while allowing for innovation. This bill adds consumer protections and clarity to a complicated but much needed industry. For example, the bill as currently drafted:
Requires that consumers can cancel their service at any time
Limits fees to $15 per monthly pay period
Eliminates fee cascading
Restricts employers from charging employees to participate in the program
Ensures that users are able to maintain and grow their existing banking relationships. The service providers can't take ownership of the whole paycheck.
We already operate with many of the responsible guardrails imposed within SB472 because we believe it's the right thing to do. We are a Public Benefit Corporation, (certified B corporation) because we will not put profits ahead of people.
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