Hotel Workers File Lawsuit: Are Employer Mini-Loans Just Philadelphia Payday Loans?
Inside Subprime: April 5, 2019
By Jessica Easto
Last year, non-unionized workers at a major hotel in Philadelphia, Pennsylvania, filed a class-action lawsuit against their employer credit union, alleging that the credit union’s “mini-loans” are predatory loans that violate the Truth in Lending Act (TILA).
TILA, which became federal law in 1968, protects consumers by requiring that lenders clearly disclose credit terms, such as annual percentage rates (APRs), fees and other charges, and repayment schedules, allowing borrowers to understand the full cost of the loan.
The hotel workers’ lawsuit alleges that the credit union that advertises products through the hotel company’s local human resources offices, did not properly disclose the full cost of its “mini-loan” products, short-term $500 loans that are marketed toward the hotel’s low-wage hourly workers. Additionally, the lawsuit alleges that the credit union is not allowed to charge APRs higher than 18 percent due to an interest cap, but accounting for all the mini-loan’s finance charges—including an unusually high $35 “application fee”—the mini-loan’s actual APR is 46 percent.
The issue is further complicated by the fact that hotel workers tend to use the mini-loans when their hours are cut and they are no longer able to make ends meet. But as part of the loan’s terms, payments are taken directly from workers’ wages and the loan requires a cash security, which, the lawsuit alleges, ensures the workers’ continued employment with the hotel company.
“By providing employees with quick cash when needed and indebting them to their employer,” the lawsuit reads, “the mini-loan allows the [the hotel company] to retain its workforce even while subjecting workers to unfair and unpredictable scheduling.”
Many hotel workers have said that they’ve had to continuously and repeatedly take out mini-loans to compensate for reduced wages. Additionally, fees associated with the loans can trap workers in a vicious cycle of debt very similar to the debt cycle often created by payday loans.
Betsy Edasery, program director at the Workers Lab, and organization that funds and initiates projects that support workers’ rights, said that the hotel case is an example of “employers continuing to place the burden on working people to solve failures of our economy—persistent low wages, unstable scheduling, zero benefits.”
The credit union has attempted to have the lawsuit thrown out, but mediation is currently scheduled for the spring.