United States: Best Practices For Using Payroll Debit Cards With Your Workforce

Q: Frank owns a small manufacturing business with a facility in Manchester. Several of his employees do not have checking accounts and have complained that they have to use check cashing providers on pay day to actually receive their wages. Frank is thinking of implementing a payroll debit card system to remedy this situation and is wondering whether such a system is legal under New Hampshire's wage and hour laws.

In a time where businesses are constantly looking for ways to lower expenses and shore up their bottom lines, a trend has emerged in the way employers are paying their employees: the payroll debit card, also known as the payroll card. Here's how payroll cards work: the employee's wages are deposited into an account and made accessible through a prepaid debit card, in lieu of receiving a traditional paper check. The employer saves the expense of distributing paper checks and employees without checking accounts avoid the hassle of having to visit a check cashing location to receive their wages, avoid paying check cashing fees, and gain the ability to make purchases over the internet or by telephone. The American Payroll Association estimates that each electronic payroll payment will be $2.75 less expensive than a paper check payment. If this sounds too good to be true, it likely is.

The reality is payroll debit cards carry unintended consequences for both employers and employees and have caught the attention of the government and opportunistic class-action plaintiff's attorneys. For example, some payroll cards charge fees for routine transactions like withdrawing cash and checking the card balance, which could be considered unlawful deductions from wages. Other employers have required that their employees receive wages through payroll debit cards (and thus required them to be subject to these fees), which, according to the federal Consumer Financial Protection Bureau, violates the Electronic Fund Transfer Act and its regulations. The practice of requiring workers to receive wages through payroll cards and using cards that charge fees has also lead to a class-action lawsuit in Pennsylvania by former McDonalds employees, claiming that McDonalds' use of payroll cards violated the Pennsylvania Wage Payment and Collection Act.

How to Avoid Running Afoul of Federal and State Law

While payroll debit cards are not per se unlawful, employers must take certain steps in implementing a payroll card system to ensure that they do not violate their worker's rights under wage and hour laws. The New Hampshire wage payment statute (RSA 275:43) expressly authorizes payroll debit cards as a means of paying employee wages, but places restrictions on how employers must use the cards. For example, among other things, the employer must: (i) provide the employee one opportunity per pay period to withdraw the balance of the card for cash, without any fees or expense, at a bank that is in close proximity to the place of employment; (ii) provide employees with written disclosure of all wage payment options, as well as all fees associated with a payroll card; and (iii) provide employees with the option of using the payroll card, and ensure that use of the card is not a prerequisite to hiring or continued employment.

Industry analysts expect the amount of active payroll cards to reach 10.8 million by 2017, up from 4.6 million in 2012.  In light of this growing practice and the risks it presents, businesses thinking of using a payroll debit card system should consider the following best practices:

1. Payroll cards must be an option, not a requirement. This is without question the most important aspect of using payroll debit cards. Employees must be presented, in writing, with all the options for receiving their wages, including traditional paper check, direct deposit, and electronic fund transfer. Employers should not, and indeed cannot, make the use of payroll cards a condition of hiring or continued employment. Employees must also have the right to cancel their participation in a payroll card program at any time, without penalty or delay in payment of wages.

2. Full written disclosure of fees and card conditions. Before agreeing to use a payroll card, the employer must present the employee with a full written disclosure of fees and other terms and conditions associated with the cards. The employer must also provide written notice of any changes in the payroll card terms or conditions.

3. Employee consent, in writing. As a corollary to the requirement that payroll cards be an option and not mandatory, the employer must also obtain the employee's written consent to use the cards as a means of paying wages.

4. Access to full cash wages. Once per pay period, the employer must allow the employee to access their full wages, in cash and without any associated withdrawal fees, from a bank or financial institution in close proximity to their place of work or home.

5. Use a widely-accepted payroll card. Employers should select a payroll card provider or brand that is widely accepted at banks or retailers, and preferably one that participates in a surcharge-free ATM network and carries deposit insurance.

6. Train your employees on the payroll cards. When presenting the employee with the written disclosure and option to use the payroll card, employers should also explain to employees how to use the cards.

7. Continue to provide wage statements. Using an electronic method of payment does not relieve the employer from its obligation under New Hampshire law to provide the employee with a written statement of all deductions from gross wages for each pay period.

8. Track the fees associated with payroll cards. Employees should monitor the fees charged to employees for using payroll cards to be sure that the total fees do not bring the employee's hourly wages below the minimum wage.

In Frank's case, he should give his employees the option of using a payroll card to receive their wages and if he follows the best practices described above, his payroll card program will likely satisfy the requirements of the New Hampshire wage statute and both benefit the employees without traditional checking accounts and improve his bottom line.

Published in New Hampshire Business Review

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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