January 17, 2014 Top Story

Tougher Scrutiny of Employer Payroll Cards

Employers warned of stricter enforcement of laws governing payroll cards

Oran F. Whiting

Employers that require employees to receive wages exclusively via payroll cards will more frequently incur the wrath of the Consumer Financial Protection Bureau (CFPB).  The bureau has issued a bulletin [PDF] reminding employers that it intends to use its enforcement power under the Electronic Fund Transfer Act of 1978 (EFTA) to stop violations of the federal laws prohibiting employers from distributing wages solely through payroll cards.

The EFTA, implemented in Federal Reserve Board Regulation E, establishes the rights and liabilities of consumers, as well as the responsibilities of all participants in electronic funds transfer activities. The primary objective of the EFTA is the protection of individual consumers engaging in electronic fund transfers. The EFTA provides certain protections for employees who choose to receive wages on employer-sponsored payroll cards, including requirements about written disclosure of applicable fees; written, telephonic, and online access to account history; card-holder limited liability for timely reported unauthorized use; and account error resolution rights. 

“It is not a surprise that a federal agency is taking this position,” opines Brian Koji, Tampa, FL, cochair of the ABA Section of Litigation’s Employment and Labor Relations Law Committee.  “There is an outgrowth in the use of these cards.”

Employers Enjoy the Benefits

Some fast-food and retail employers prefer payroll cards as a secure and convenient way to distribute wages. “Electronic transfers in the form of direct deposits to employees’ bank accounts became popular with employers because of cost and convenience,” according to Dinita L. James, Phoenix, AZ, director of the Section of Litigation’s Publications Division.  “Because some employees did not have bank accounts, these individuals required payment of their wages via other means. Payroll cards and debit cards became a popular alternative,” James continues. “The drawback is that heavy fees are often associated with the use of such cards.”

Employees Complain of Detriments

The controversy over pay cards mostly stems from the fees charged by banks. A number of employees, paid via payroll cards, have complained to the CFBP about high and unexpected fees for routine transactions including card setup, ATM withdrawals, monthly statement inquiries, lost or stolen card replacement, and cash-back receipts. In some cases, the fees are substantial enough to effectively reduce the employee’s hourly wage below the minimum wage.

Now, however, the use of pay cards and the fees charged by banks that issue them are under scrutiny on multiple fronts, including the New York State Office of the State Attorney General’s Office and plaintiffs in class-action lawsuits.  The New York State AG’s Office is investigating whether payroll card rules are being broken in New York.  Its office recently sent letters to 42 companies doing business in New York, including national retailers such as Best Buy, Costco, Home Depot, Sears, Walgreens, and Walmart, asking them to provide information about their payroll card policies and procedures.

A plaintiff in Pennsylvania filed suit last summer, alleging that her employer, a McDonald’s franchise, told her that a payroll card was her only option.  Claiming that her pay would drop below minimum wage after all fees were assessed, she quit and filed suit against the franchise owners.  She seeks compensatory, punitive, and liquidated damages against the company for its “ill-gotten gains contrary to justice, equity, good conscience and Pennsylvania law.” 

Implement with Caution

While it may not be possible to inoculate a pay-card program from legal challenges, employers can mitigate the risks.  “Organizations should insure compliance with federal, state, and local laws and regulations which generally shape what employers can and cannot do with their pay-card programs and other payroll-related issues,” recommends Koji. “These laws contain an array of legal and regulatory requirements for employers wanting to use pay cards.” 

The National Consumer Law Center and the American Payroll Association issued a joint statement [PDF] spelling out best practices for employers. These include using a widely accepted card; providing clear and continuing communication and information about all applicable fees; training employees on how to best use the cards; and allowing workers to access their full wages in cash—without a fee—at least once each pay period.

Employers can also obtain consent from the employee to being paid via pay card. The consent form should be clear and written in plain English. The form can state that consenting to be paid by pay card is not a condition of employment, that employees have been provided with a list of fees associated with the pay card, and that employees have been told they can withdraw their wages, in full, without incurring a fee.

Businesses offering either direct deposit or a pay card have the opportunity to remind employees of the option to open a bank account, participate in bank-at-work programs, or affiliate with local credit unions that may be available for people who have been unable to open a bank account elsewhere. Entities should also compare their programs to others in the marketplace to make sure their rates and programs compare favorably with what is available from other vendors. “Though the use of payroll cards is increasing, they will never completely replace direct deposit or paper checks for that matter,” James says.


Oran F. Whiting is an associate editor for Litigation News.

Keywords: payroll cards, employers, electronic transfer, fees, employee wages, Federal Reserve Board Regulation E, Electronic Fund Transfer Act of 1978

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