On September 12, 2013, the Consumer Financial Protection Bureau (CFPB) published CFPB Bulletin 2013-10. The stated purpose of this publication was "to reiterate the application of the Electronic Fund Transfer Act (EFTA) and Regulation E, which implements the EFTA, to payroll card accounts. " However, the agency's press release that accompanied its new bulletin was more pointed.
The release was entitled CFPB Bulletin Warns Employers Against Exclusive Use of Payroll Cards. It explained that the agency was publishing the bulletin for a specific reason: "The CFPB has heard reports of employers, particularly in the retail and food service industries, distributing wages solely through payroll cards." Further, the agency claims to have received complaints of unexpected fees for activities such as ATM use, teller withdrawals and balance inquiries. Thus, in addition to simply reiterating basic rules applicable to payroll cards, the bulletin also announced that "in exercising our enforcement authority, our goals are to be proactive about identifying violations, stopping violations before they grow into systemic problems, maximizing remediation to consumers, and deterring future violations."
Regulation of Payroll Cards
The Electronic Funds Transfer Act (EFTA) regulates the electronic transfer of funds to and from the accounts of consumers. Under the EFTA, a payroll card account is an account that is "established directly or indirectly through an employer, and to which transfers of the consumer's salary, wages, or other employee compensation are made on a recurring basis." 12 CFR 1005.02(b)(2). In light of the surprising number of workers – especially young employees – who do not maintain bank accounts, an increasing number of employers have come to view payroll card accounts as a desirable form of direct deposit for paychecks.
Many employers would be surprised to learn that payroll cards are regulated at the federal and state levels. Specifically, under federal law payroll cards fall under the jurisdiction of the CFPB under the EFTA. More specifically, EFTA's Regulation E, which the CFPB administers, is specifically directed at payroll cards, and applies regardless of whether a payroll account is administered by an employer or a third party such as a payroll service or a depository institution.
However, it is important to keep in mind that the payment of wages laws that exist in virtually every state also apply to payment of wages by way of payroll card or other electronic transfer, and in some states, New York and Pennsylvania among them, legislative, investigative and enforcement efforts to reign in the use of payroll cards by employers are active . Thus, the fact that Regulation E may permit an employer practice respecting payroll cards in a specific circumstance does not mean that the practice will be permitted in a particular state. For that reason Regulation E must be viewed as establishing a baseline or minimum level of protection that the laws of each state may exceed.
Regulation E Forbids Employers from Requiring Direct Deposit of Wages with, or Acceptance of Payroll Card from, a Specific Institution
According to the CFPB, "Regulation E prohibits employers from mandating that employees receive wages only on a payroll card of the employer's choosing." However, the agency observes, "Regulation E permits an employer to require direct deposit of wages by electronic means if the employee is allowed to choose the institution that will receive the direct deposit." Or, an employer may "offer employees the choice of receiving their wages on a payroll card or receiving it by some other means." State law governs permissible alternative wage payment method(s). However, examples include direct deposit to an account of the employee's choosing, a paper check, cash, or other evidence of indebtedness.
Other Conditions on Use of Payroll Cards
Regulation E imposes additional requirements on employers that use payroll cards to pay their employees. The primary requirements are:
Disclosures: Payroll cardholders must be advised of all fees charged by the financial institution connected with electronic funds transfers and card use, any limitations on liability of the financial institution and the kinds of transfers that may be made using the card. The form and timing of these disclosures also are specified.
Account History: Regulation E requires a payroll card issuer either to provide periodic account statements or make a history of account transactions, including fees, available to the cardholder via Internet or on request by telephone or in writing.
Limited Liability Protection: Cardholder liability for unauthorized transfers is limited, subject to reporting obligation by cardholder.
Error Resolution: With certain requirements to report reasonably promptly after finding error, cardholders are entitled to a response from a financial institution after discovering error.
Conclusion
Employers that pay at least some of their employees by payroll card, particularly those in retail and food service sectors, should be prepared for investigatory and enforcement activity by CFPB following its recent bulletin. It would be sensible for all employers that pay at least part of their workforce by direct deposit into a payroll card account – including those using a payroll service that pays in that manner – to ensure that they are in compliance with Regulation E. Equally important, further review to determine that the use of payroll cards is compliant with varying state law wage payment requirements in each applicable jurisdiction also should be undertaken at the same time to ensure full protection.
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