To Fee or Not to Fee—The Pros and Cons of Payroll Cards

Payroll cards are having a moment. Recent articles in The New York Times, USA Today, and ABCNews.com have all highlighted the growing trend of employers paying wages to their employees via debit card. In addition, several U.S. senators recently asked federal agencies, in a strongly worded letter, to issue guidance regarding this pay practice. What, then, are payroll cards—and, more importantly, should employers use them?

What Are Payroll Cards?

Payroll cards are simply a form of electronic payment of wages. An employer deposits the employee’s wages onto a reloadable prepaid card issued to the employee; the employee can then use the payroll card as if it were a typical debit card to withdraw cash from an ATM or bank teller, make point-of-sale or Internet purchases, and pay bills online. These cards are an alternative to other forms of electronic payment, such as direct deposit, or traditional methods of payment, such as a paper check.

Why are payroll cards becoming so popular? The answer is simple—money and ease. Payroll cards, like direct deposit, save employers a significant amount of costs associated with paying wages to their employees. Additionally, payroll cards provide employers with a convenient means of initiating final wage payments to workers instead of issuing a physical check and sending it overnight to the fired employee.

Payroll cards provide many advantages to employees as well. A significant—and rapidly growing—percentage of the working population is “unbanked,” meaning that these employees do not have or are not eligible for bank accounts. Unbanked employees cannot take advantage of direct deposit, and prior to the advent of the payroll card, were forced to receive their wages via traditional paper paychecks, for which they sometimes incurred high fees to cash. Unbanked employees were also denied the convenience of a debit card to make point-of-sale purchases or online bill payments—that is, until the dawn of the payroll card age.

Are Payroll Cards Right For Your Company?

The first and most important consideration is whether the state where the employer is located allows payroll cards. The law in this area is rapidly evolving, and most states expressly permit the use of payroll cards. However, it is important to read the fine print on the regulations and the payroll card paperwork. Consider the following:

• Some states allow employers to mandate payroll cards (usually as an alternative to direct deposit), while others only permit the use of payroll cards if the employee voluntarily—and knowingly—elects the option as an alternative to a paper paycheck. Further, most agencies have interpreted federal law as prohibiting employers from requiring employees to receive wages via payroll card with no other alternative.
• Some states require that employees be allowed a specific number of free withdrawals from ATMs, while others only require that an employee be able to obtain the full amount of wages on the card once without fees. This can be accomplished through a courtesy check or a cash withdrawal from a bank teller.
• Some states do not permit employers to benefit in any way from payroll card fees. Lower payroll costs or any type of commission for signing up employees to use payroll cards could be considered to be a “benefit” and run afoul of these laws.
• Some states require that ATMs and banks associated with free withdrawals from the payroll card be located within a specific geographic area, while others have no such restrictions.

Many of the terms of payroll cards may be negotiated between the vendor and the employer—and many of the fees that employees may incur may be avoided if employees are properly informed. Accordingly, employers should take steps to negotiate the fewest and lowest fees possible and provide as much information about payroll card options and potential fees to their employees.

Best Practices

At the end of the day, payroll cards appear to be a great complement to direct deposit—a way for employers to reduce the costs associated with paper paychecks while still serving their unbanked employees. A best practice would be for employers to offer both direct deposit and payroll cards (assuming state law permits it), and allow employees to opt in to the method of payment they prefer, after informing them of all of the benefits and fees.

Jennifer S. Rusie is a shareholder in the Nashville office of Ogletree Deakins.