TBA Law Blog

Posted by: Christy Gibson on Jan 10, 2014

By Jennifer Rusie*

Payroll cards are having a moment.  Recent articles in the New York Times, USA Today and ABC News have all highlighted the growing trend of employers paying wages to their employees via debit card.  We have also begun to see the first few lawsuits regarding payroll cards.   So, what exactly are payroll cards—and more importantly, should employers use them?

Payroll cards are simply a form of electronic payment of wages.  An employer deposits the employee’s wages onto a reloadable prepaid card that is issued to the employee, and the employee can then use the payroll card as if it were a typical debit card - can withdraw cash from an ATM or bank teller, make point-of-sale purchases, make 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 cutting a physical check and overnighting it to the terminated employee. 

Payroll cards provide many advantages to employees as well.  A significant (and rapidly growing) percentage of the working population is “unbanked”, meaning 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 a traditional paper paycheck and would incur high fees to cash these checks.  Unbanked employees also were deprived of 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.    

You may be asking yourself, “should I be advising clients to pay their employees with payroll cards?”  In order to answer this question, you must consider both federal and state law.  The only federal law that explicitly deals with payroll cards is Regulation E of the Electronic Fund Transfer Act, although innovative plaintiffs are arguing that payroll card fees may reduce their wages below minimum wage and therefore run afoul of the Fair Labor Standards Act.

Regulation E states that no “financial institution or other person” (i.e., employer) can mandate that an employee receive direct deposit into an account at a particular institution (i.e., a specific payroll card).  In other words, Regulation E prohibits employers from mandating that employees receive wages via a payroll card of the employer’s choosing with no other options available.  These options could be direct deposit, check, cash or any combination of the three.  Regulation E preempts state laws relating to payroll cards, but only to the extent that the state law is inconsistent with Regulation E. 

On September 12, 2013, the Consumer Financial Protection Bureau issued a bulletin regarding payroll cards and the effect the Electronic Fund Transfer Act has upon it.  This bulletin does not change the current state of federal law regarding payroll cards, and it does not have any effect on state laws; however, it does let the consuming public know that the CFPB is very interested in payroll cards.

Importantly, federal law is not the only consideration—employers must consider the state law(s) where the employees are located, as the law in this area is rapidly evolving.  While a number of states expressly permit the use of payroll cards, it is important to read the fine print on these regulations and the payroll card paperwork, as many of the laws (and payroll cards) have catches.  Some pitfalls include:

·      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; and

·      Some states require that employees be allowed a specific number of free withdrawals from ATMs, while others only require that an employee must 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.

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

It is clear that payroll cards are not going away any time soon, and neither are the agencies who regulate them.  That said, it is in the best interest of employers to dot their I’s and cross their T’s when dealing with payroll cards to avoid being targeted by government agencies or possibly defending a class action.


*Jennifer Rusie is a shareholder with the Nashville Office of Ogletree Deakins, where she represents management in the area of labor and employment law with an emphasis on employment litigation, including cases involving Title VII, the ADAAA, ADEA, FMLA, FLSA, SOX and common law wrongful termination.  She is a graduate of New York University Law School. Ms. Rusie may be reached at 615-687-2223 or jennifer.rusie@ogletreedeakins.com.