Understand the benefits and risks associated with this new payment option

Our world is becoming more and more electronic, and people are becoming increasingly accustomed to paying for goods and services with the swipe of a plastic card. Employers and even some employees are beginning to consider pay cards an attractive payment option. A pay card is a stored value card provided by a financial institution that works like a traditional debit or ATM card.

The Legality of Employee Pay Cards

How Does it Work?

An employer contracts with a service provider to have the wages due to employees transferred onto a pay card each pay period. Then, the employee uses the pay card to access his or her wages by either withdrawing funds or using the pay card in the same manner as a debit card. For those comfortable with such transactions, a pay card may be ideal. For employers, using pay cards can present significant cost savings over issuing paper checks, as well as significantly reducing the headaches of getting paychecks to multiple work sites on payday. However, both employers and employees should keep certain regulations and legal developments in mind when using pay cards.

Which State Laws Regulate Pay Cards?

For employers, particularly multi-state employers, the primary consideration with pay cards is the slowly developing patchwork of state laws regulating the use of pay cards. Many states still have not specifically addressed the use of pay cards. Employers are forced to interpret statutory language created during a time when employers had only one option—issuing a paper check in person or by standard mail. The developing state laws contain provisions designed primarily to protect employees. Examples include preventing an employer from mandating that a pay card is the only method of receiving pay and protecting the employee from fees and costs associated with accessing funds on the pay card. While the majority of states still do not have laws specific to pay cards, many state departments of labor have provided similar guidance: Use of a pay card must be voluntary, and fees and costs for use must be limited or even nonexistent.

The developing laws related to fees and costs are designed to protect employees and their wages. Many states require that an employee be allowed to withdraw the entire amount of wages from the card at least once per pay period without any fee or cost associated with the wage withdrawal. A few states have even stricter laws, such as requiring a written agreement between the employer and the employee before pay cards can be activated.

Which Federal Laws Regulate Pay Cards?

Even in states that do not directly regulate an employer's use of pay cards, employers must be careful of the implications of traditional laws protecting an employee's pay. For instance, for a nonexempt employee, the Fair Labor Standards Act (FLSA) does not allow an employer to make deductions from an employee's pay if it reduces the employee's pay below the minimum wage.

For an exempt employee, the FLSA limits the deductions an employer may make from an employee's "salary basis." Thus, employers must be wary of pay card fees and costs that are paid by the employee rather than by the employer. For an employee who makes minimum wage or close to it, any fees associated with the use of a pay card present a problem.

While this concern may only arise for employers with low-paid workers, it serves as a reminder that long-standing employment laws continue to impact changing technology and innovations in ways that were not originally intended.

Because pay cards are financial products, employers also must be aware of regulation from areas not traditionally associated with employment matters.

For instance, the Federal Consumer Financial Protection Bureau (CFPB) recently issued a bulletin indicating that an employer may offer a payroll card only if the employee is allowed to choose the financial institution at which the wages will be deposited and if the employee also is offered the option to receive pay in a different manner.

Payroll cards fall under the CFPB's jurisdiction under the Electronic Fund Transfer Act, and Regulation E. state law typically governs which alternative payment methods employers must offer such as paper check or direct deposit in addition to payroll cards.

Federal law contains provisions specific to payroll cards that provide employees with certain consumer protections such as notice of fees, access to account history and limitations on unauthorized use. Employers must be careful to ensure they utilize a service provider that meets these requirements. For example, employees are entitled to notice regarding any fees that may occur for the electronic transfers of funds to or from the card. These disclosures must be clear, in writing and in a form that employees can keep in their records.

Further, the card issuer must provide either periodic statements for the employee's pay card or generally make available the employee's current account balance and 60-day account history. The account history must include information on any fees imposed for fund transfers. Finally, an employee's liability for unauthorized use of his or her card must be limited, provided the unauthorized use is reported within a certain period of time.

If an employee reports a payroll card account error, the financial institution must respond as long as the report is received within a certain period of time.

What Do Employees Think?

For many employees wary of a traditional bank account or who desire banking flexibility, pay cards are ideal. However, some employees complain of unexpected fees for activities such as ATM use, teller withdrawals and checking the balance of a card. As with many employment issues, the more up-front education the employer provides, the better employees will respond to pay cards.

Additionally, employers should consider educating employees about the need to be conscious of pay card security measures. For example, while a pay card can be replaced, an employee should take precautions that minimize the chance that their card could be lost or stolen.

Likewise, while the pay card will be protected with an individual pin, unauthorized usage may be a concern. While employers have no direct obligation to remind employees about financial responsibility, such helpful hints could be beneficial for some sectors of the workforce.

For any pay card program, an employer must continue to monitor potential legal developments at both the federal and state law level. In the future, pay cards may be the primary wage delivery mechanism. For now, they present a scenario in which more regulations are likely to be established as their use becomes more prevalent.