Most employers long ago started encouraging employees to ditch paper checks in favor of direct deposit. Now more employers are pushing their workers to receive pay via debit cards—called paycards—that work just like ATM bank cards.
Trouble is, not all employees want to be paid that way—and the law is often on their side.
THE LAW: Federal law requires employers that wish to pay employees with paycards to provide alternatives. Those alternatives often depend on state payroll laws.
Employees must consent to paycards in California, Colorado, Delaware, Florida, Iowa, Maryland, Maine, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New York, North Dakota, Oklahoma, Oregon, Texas, Utah, Vermont and West Virginia.
Employers in Arizona, Kansas, Michigan, North Carolina, Tennes-see and Virginia may mandate paycard use, with some restrictions.
WHAT’S NEW: Alarmed by reports of banking fees eating into low-wage earners’ paychecks, several U.S. senators asked the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Labor (DOL) to look into paycard practices. The result was a federal rule requiring employers to provide an alternative pay method to paycards.
Additionally, a group of employees in Pennsylvania filed a class-action suit alleging that they were forced to take their pay on paycards, thus incurring fees for accessing their wages. The suit seeks the return of those fees. Pennsylvania does not have a law specifically regulating payroll debit cards, but the fees could run afoul of the state’s payroll laws and possibly the Fair Labor Standards Act ().
The issue: Paycard fees may not be so costly that they bring employees’ pay below the minimum wage.
In the Pennsylvania case, the employees’ first over-the-counter withdrawal was free. That meant they could theoretically receive their entire net pay fee-free.
However, they weren’t made aware of other fees associated with the cards:
- $1.50 for each ATM withdrawal
- $5 for the second and every subsequent over-the-counter withdrawal
- $1 per ATM balance inquiry
- $15 to replace a lost card
- 50¢ for each declined transaction
- $10 per check to close an account
- $10 per month inactivity fee, which applied after 90 days.
Employees claim that a manager told them that they had to activate their paycards so they could be paid. Employees were automatically enrolled in the paycard program, and weren’t offered another option, such as direct deposit or checks.
In response to the Pennsylvania lawsuit, the state of New York launched an investigation of 20 large employers. In addition, 16 senators asked the CFPB and the DOL to weigh in on the fee issue.
HOW TO COMPLY: If you have previously required employees to receive their wages through paycards, you must now offer an alternative. (Check laws in all states in which you operate to determine what options are available.)
Give employees a choice of alternative pay methods. If any fees are involved, fully disclose them to employees. If those fees ultimately reduce employee pay below the minimum wage, you may be in violation of the FLSA.
You may be able to hedge against this by advising employees to limit fees by making a few large withdrawals instead of many small ones. However, an employee who manages to incur sufficient fees to lower pay below minimum wage could still file an FLSA complaint.
Because employers are responsible for both reporting all deductions from pay and ensuring employees are paid the minimum wage, it is not clear what responsibilities employers have for monitoring the fees employees incur. Because employees incur fees after the paycheck is deposited into the paycard account, employers have no way of knowing the actual net amount the employee will receive.
Neither the CFPB nor the DOL has addressed this issue, other than to say fees may not reduce employee pay below the minimum wage.
Speak with one voice
Prepare a packet for new hires that explains all pay options, including any fees. Assure employees that they are free to choose any pay alternative, and it will not affect their employment in any way.
Train managers to always refer to the packet as the final word on payroll options. That way managers can’t contradict company payroll policy or inadvertently omit mention of fees.
Make it easy to change
Should an employee enrolled in a paycard program wish to opt out, the process should be easy. In addition, be sure not to pressure employees to keep using paycards if they have clearly decided not to.
It’s understandable why employers may be enamored of paycard systems—banks regularly offer incentives for employers to use them. But paycards are a new area of payroll law and all the rules are not yet clear. Failure to implement paycards properly could end up costing employers more in the long run and hurting employee morale.
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