Best practices for using payroll debit cards

They carry unintended consequences for both employers and employees

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 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.

A. At a time when 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.

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.

In reality, payroll 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 led to a class-action lawsuit in Pennsylvania by former McDonald’s employees who claim that use of payroll cards violated the Pennsylvania Wage Payment and Collection Act.

Growing practice

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 expressly authorizes payroll debit cards as a means of paying employee wages, but places restrictions on how employers must use the cards.

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:

 • 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.

 • 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.

 • The employer must also obtain the employee’s written consent to use the cards as a means of paying wages.

 • Once per pay period, the employer must allow employees 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.

 • 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.

 • When presenting the employee with the written disclosure and option to use the payroll card, employers should also explain how to use the cards.

 • 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.

 • Employers 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.

Nicholas Casolaro, an attorney in the Litigation Department of the McLane Law Firm, can be reached at 603-628-1246 or at nicholas.casolaro@mclane.com.