Paying employees is a complicated business. For employers in retail and other industries where employees may not have bank accounts, payroll cards have emerged as a potential solution.

But are payroll cards an answer, or just an illusion?

Generally speaking, payroll cards (or pay cards) function as debit cards. The employer deposits the employee's pay into an account, and the payroll card allows the employee to withdraw funds, authorize payments, or even write checks. The benefits to both parties are seemingly undeniable. Employees receive immediate access to their money. Payroll card accounts are often less expensive for the employer than cutting physical checks. Payroll cards are available to employees without bank accounts, and employees do not have to pay check-cashing fees.

On the other hand, users of payroll cards may be charged fees for withdrawals, transfers, replacing cards, or even inactivity. These fees may run afoul of widely varying state laws that are often more onerous than federal regulations. For example, many states require that 100 percent of net payroll funds be made accessible to employees without cost on at least a pay-period basis. This year, the New York Attorney General launched an investigation into the use of payroll cards by many large retail employers within the state.

Some states allow pay cards to be the default method of payment, although restrictions may apply. However, in some states -- specifically, Montana and Rhode Island -- the departments of labor have taken the blanket enforcement position that any use of pay cards for wage payment is unlawful. (It is important to note that the statutes in these states are silent on the use of pay cards. Accordingly, it remains to be seen whether the courts would uphold the labor departments' position, or whether the departments might choose to take a different enforcement position, in the future.)

The argument could also be made that the use of pay cards – if mandated by employers, and if unavoidable fees are charged – could impermissibly drop employees' pay below the applicable minimum wage.

Another area of concern is the federal Electronic Fund Transfer Act and its implementation arm, Regulation E, both of which provide consumer protection related to the use of electronic funds. Among other things, the EFTA prohibits employers from mandating that employees' wages be deposited at a particular financial institution. (Under the EFTA, an employer may require direct deposit, so long as the employee can choose the place of deposit.)

According to a recent bulletin from the Consumer Financial Protection Bureau, many of the protections of the EFTA and Regulation E apply to payroll cards. Specifically, the Bureau advises that employers may not require employees to receive their wages on a payroll card of the employer's choosing. The employer must offer at least one other way for the employee to receive wages. Other requirements that pertain to payroll cards include fee disclosure, access to account history, limited liability for unauthorized use and error resolution rights. The Bureau also notes that it has enforcement power over employers that it believes are violating the EFTA and Regulation E.

Despite all of this regulation and investigation, payroll cards may still be the best solution for many employers. The following are some tips that will help you protect your company.

Be aware of your state's law. As previously noted, many states have requirements that are more restrictive than the federal requirements, and the rules diverge widely. For example, according to another recent public advisory bulletin, the State of Illinois requires that (1) employees voluntarily agree to the use of payroll cards; (2) all fees, penalties and costs associated with the use of such cards be disclosed in writing; and (3) employees be able to obtain "the full monetary value on the payroll card without discount." In addition, Illinois employers must provide an itemized statement of hours, wages and deductions; and the use of a payroll card must be revocable with another alternative available for the payment of wages.

Freedom of choice. Employers should offer employees a choice regarding how they receive their wages. The Bureau specifically advises that employers offer one or more alternatives to the use of pay cards, such as direct deposit, paper check, or cash.

Be aware of your payroll card provider. Not all payroll cards are created equal in terms of the amounts and types of fees charged. All employers who use payroll cards – but especially those in states that require full disclosure – should make sure they know and disclose the terms and conditions associated with use of their providers' cards.

As always, keep good records. With so many states and federal agencies taking the position that employers cannot mandate the use of payroll cards as the only means of delivering payroll, it is important to create and maintain records that will demonstrate that employees are offered multiple choices for how they receive their wages.

Ultimately, the use of a payroll card is a highly fact-specific decision that should be made based on the needs of your company and the applicable state and federal regulations.