United States: Paycard Use Comes With Convenience, Regulation

For some employers, paycards have become a convenient and cost-effective alternate method to pay their workers, and for employees to have fast and easy access to their wages. Even direct deposit, for all the administrative ease it provides, is often less attractive than paycards for employees whose banks have a mandatory deposit holding period before wages can be accessed. As a consequence, the move to paying employees with a paycard system is gaining traction, and appears to be growing in popularity among employers and employees alike.

A paycard system functions similarly to a bank debit card, except it does not require an employee to have a personal bank account from which he or she draws funds. Instead, an employer funds an account linked to an employee's specifically issued paycard, and on every payday the funds paid to the employee are immediately accessible for access through any ATM terminal or debit card pay station. This gives employees the freedom to take as cash all their wages at once, or to spend them in smaller amounts, such as when they buy groceries at a market. The companies that provide these paycard benefits often offer less expensive administrative fees to employers than more traditional payroll services, and many employees appear to like paycards because there is no need for them to have a bank account or use a paycheck cashing service. Paycards can also be convenient to employees because of the immediate access to funds without any bank holding period and the ability of employees to access their pay at any of thousands of locations. However, paycards have not come without some concern on the employee side, as the paycard service may charge fees to the paycard user based on the way he or she uses the card. For example, while a paycard administrator may allow an employee the ability to withdraw the entire balance of his or her recent paycheck without a fee, or allow a specified number of debit transactions without a fee, subsequent transactions carry a small fee taken out of the employee's balance.

The growing use of paycards has also come with new state laws regulating the way in which employers can permissibly use paycards and the terms of use employees are subjected to if they elect to have their wages paid by paycard. At least 27 states have now enacted a variety of laws that address how paycards may be used by employers — a number that is likely to climb. The patchwork of regulations, however, make it important for any employer — and especially multistate employers — looking to move to wage payment by paycard to ensure they review their own obligations under the law, as well as their agreements with paycard vendors to ensure the vendor itself is not causing the employer to inadvertently violate the law. Indeed, though it would seem reasonable for an employer to expect that part of what it pays for with a paycard administrator is assurance that the specific paycard program complies with all applicable laws, in this climate of rampant wage and hour class action lawsuits, employers are nevertheless wise to conduct their own due diligence on any potential paycard program before implementing it and thereafter auditing it as the law in this area develops.

No two laws are exactly the same, and there is no guarantee that any one state agency that regulates payment of wages within its borders will act similarly to equivalent agencies in other states. Employers who are either currently using or considering paycards to pay employees should consult with legal counsel to ensure their practices, and their vendors' terms of use, are in sync with the most recent legal and regulatory developments. The following items are just a sampling of what employers should look for in their own states:

  1. Does the law require any written notice to employees about the paycard system?
  2. Can employers mandate that employees enroll in the paycard system, or must it be voluntary enrolment?
  3. What alternative methods of payment must employers provide employees?
  4. Must the paycard vendor allow employees access to all wages, or can they require a minimum balance be maintained?
  5. How often may employees access their wages without a fee?
  6. Do paycard vendors have a right to charge a "declined transaction" fee, like many bank debit cards do?
  7. What disclosures must be made to employees who enroll in a paycard system, and whose obligation is it to provide the disclosures?
  8. Who must provide balance information, and how often must it be provided?
  9. What type of overdraft regulations exist for paycard users?
  10. Are there notice requirements that must be provided to terminated employees?

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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