NEW YORK (Reuters) - DailyPay, which offers a product that lets workers collect paychecks faster in exchange for a fee, sued New York Attorney General Letitia James on Monday to thwart a potential lawsuit claiming the product is an illegal loan.

In a complaint filed in Manhattan federal court, DailyPay said James' threat stemmed from her probe begun in 2022 into the "earned wage access" industry, as part of an overbroad attempt to declare on-demand pay products illegal.

DailyPay said its product "does not create a debt obligation" for workers trying to bridge the gap between payroll schedules and when bills come due, because they are not required to repay anything even if employers fail to make payroll.

The New York-based financial technology company said its only fee is a $3.49 charge to expedite money transfers, comparable to fees for ATM withdrawals and Venmo transfers.

"It's disappointing that the Attorney General's office decided to preempt the bill pending in the state legislature and attempt to take this valuable service away," Jared DeMatteis, DailyPay's chief legal and strategy officer, said in a statement.

"The actions taken by the Attorney General's office suggest that it prefers consumers to rely on loan sharks or pay higher overdraft and late fees," DeMatteis added.

James' office had no immediate comment.

DailyPay said James' agreement not to sue expired on April 4. The lawsuit seeks a declaration that DailyPay does not violate New York consumer protection and usury laws.

Many U.S. states are expected to continue close monitoring of the financial services industry even as the Trump administration curbs oversight at the federal level.

Founded in 2015, DailyPay said more than 5 million employees have access to its products, which also include prepaid Visa debit cards, credit monitoring and financial counseling.

The case is DailyPay LLC v James, U.S. District Court, Southern District of New York, No. 25-02849.