With the growing popularity of payroll cards, employers that utilize them, or are considering implementing them in the future, must be aware of the potential benefits and risks involved.
Employers in virtually every industry have turned to payroll cards as a means to deliver wages to employees. Payroll cards offer employers and employees several advantages, including the convenience and security of a personal identification number–protected card and the avoidance of the typically high fees charged by check-cashing services. Payroll cards also are a paperless, "green" option, which can reduce an employer's processing costs. According to one estimate, 4.6 million employees received $34 billion in wages via payroll cards in 2012—numbers that are expected to double in five years. However, payroll cards have been the subject of considerable governmental interest. Recent federal and state developments in the field of payroll cards include the following:
- The Consumer Financial Protection Bureau (CFPB) issued a bulletin to "reiterate" the applicability of the Electronic Fund Transfer Act (EFTA) and its implementing regulation (Regulation E) to payroll cards. Most critically, the guidance stated that Regulation E "prohibits employers from mandating that employees receive wages only on a payroll card of the employer's choosing." The CFPB also highlighted certain consumer protections that apply to both employer-chosen payroll cards and employee-directed deposits, such as the receipt of fee disclosures, access to account histories, and resolution of complaints.
- The plaintiffs' bar has taken notice of payroll cards, bringing putative class actions based on state wage laws. The plaintiffs in these suits allege that employers fail to offer legally required alternatives to payroll cards and suggest that employers unfairly benefit by implementing payroll card systems. The risk of litigation appears to be on the rise, as multiple law firms are actively soliciting information from employees who are paid via payroll cards.
- As widely reported in the media, in July, the New York Attorney General instituted an investigation into employers' use of payroll cards. While the investigation initially focused on 20 employers, more recently, the number of employers receiving requests for information from the New York Attorney General has grown. Like many other states, New York law supplements federal law, creating an additional layer of compliance for employers and card issuers.
- In Connecticut, the state Department of Labor recently changed its position on payroll cards, which had been that payroll cards are a form of voluntary direct deposit. In 2009 and 2012, legislation was introduced that would have expressly recognized the use of payroll cards. Because the Connecticut legislature failed to act on either bill, the Department of Labor has taken the position that payroll cards are not authorized under the Connecticut wage payment statute.
- Several other state legislatures are considering proposed laws that would limit or prohibit the use of payroll cards. As payroll cards grow in popularity, legislative interest is likely to increase, and employers with employees in multiple states face an increasingly complex compliance regime.
Key Compliance Issues
Payroll cards implicate a variety of overlapping federal and state laws, including the federal Fair Labor Standards Act; federal banking statutes, such as the EFTA and Regulation E; escheat laws; state wage and hour laws; and federal and state consumer protection statutes. Several questions arise from this complex regulatory framework, including the following:
- How will federal and state law interact in this area, and when can employers mandate the use of electronic wage-payment options? Although the CFPB has interpreted the EFTA and Regulation E to prevent employers from mandating the use of payroll cards, about half of the states presently allow an employer to mandate electronic pay, which includes the option of a payroll card. Others permit employees to affirmatively choose electronic pay, and some require the alternative of a paper check. Because the CFPB is empowered to determine whether and to what extent the EFTA and Regulation E preempt state law, there is a high likelihood of additional regulatory action in this area. Given this possibility, as well as potential future legislation, employers need to keep current and may be required to modify their existing payroll practices.
- Will fees assessed by a payroll card provider trigger liability under wage or consumer protection laws? Whether service charges or fees result in liability under federal and state laws depends on several factors, such as the employee's rate of pay, the amount and nature of the charge, the terms and conditions of the payroll card, and, of course, the jurisdiction. Employers should work with counsel to determine which fees are permissible.
- Are employees provided with all legally required disclosures? Numerous states mandate when, where, and how employers must provide employees with pay stubs or other wage information. Federal laws, such as section 1005.7(b) of Regulation E, also impose disclosure requirements on financial institutions offering payroll cards. Employers must ensure that disclosures are made in the time and manner required by law, which can be particularly challenging where a service provider has taken primary responsibility for payroll communications. Employers may wish to evaluate their service agreements in light of recent events to ensure that they are adequately protected in the event of litigation or investigation.
- Are "convenience checks" or other alternative forms of payment sufficient forms of wage payment? Many payroll card providers offer paper "convenience checks" or other alternatives to employee cardholders. Whether these alternatives pass muster under state banking and wage laws can be a complex question. For instance, some states require payment via a "negotiable instrument," while others require paper checks to be "issued by the employer."
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