Electronic wage payment can benefit employers and employees alike. For employers, it eliminates check fraud exposure and costs to employers associated with check processing, reconciliation, and replacing lost or stolen checks. Employees do not have to wait for a check to be issued or to wait in line to cash their paychecks. They have instant access to their pay on payday. But employers have had difficulty extending the benefits of electronic payroll to employees across the board because direct deposit requires that the employee have a bank account.
Payroll cards can change that. An employer can issue a payroll card to an employee through a financial institution and can load the employee's pay onto the card via ACH each pay period. The employee can then use the card like any other debit card, making purchases, withdrawing cash from an ATM, and managing the card online.
Employers' use of payroll cards are regulated by state law. For example, in Tennessee, employers must provide the option of being paid via direct deposit or payroll card. If an employee elects to be paid by direct deposit but does not designate an account at a financial institution in a timely fashion for the transfer to occur, the employer may arrange to pay the employee via payroll card. Further, the employee must have the ability to make at least one withdrawal or transfer each pay period without cost to the employee for any amount contained on the card; and the employer must provide the a full written disclosure of any fees that may apply.
But recently, as this article in Sunday's New York Times shows, the use of payroll cards have come under the scrutiny of consumer advocates and class action lawyers, who are concerned about the fees associated with many uses of the card. According to the article, some major employers, including Taco Bell, Walgreens, and Wal-Mart, offer payroll cards to their employees. While some employers and card issuers maintain that payroll cards are useful for workers without bank accounts and the card fees are usually lower than those associated with check-cashing services, others believe the "lack of regulation in the payroll card market . . . leaves cardholders swimming in fees." Federal Reserve Regulation E, which, among other things, limits the consumer's liability for unauthorized fund transfers, explicitly covers payroll card accounts, 12 U.S.C. § 205.2(b)(2). But other limitations on fees associated with services like ATM withdrawals, ATM balance inquiries, and inactivity, do not apply to payroll cards. And some employees say that they cannot transfer funds from the payroll account to a checking account without incurring a fee.
On Monday, the New York Times reported that New York's Attorney General, Eric T. Schneiderman, sent letters to 20 employees seeking information about these fees and whether employers are forcing workers to accept payroll cards as a condition of their employment.
Some states allow employers to eliminate paper checks for payroll altogether. Others give employees the right to options. What's the right answer? And in times when the number of "unbanked" families is growing, do payroll accounts need more federal regulation?
John Park also contributed to this post.
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