As payroll debit cards receive increased scrutiny from state agencies, the plaintiff’s bar, and the media, employers using debit cards to pay their employees’ wages should review their practices to ensure they are compliant with existing state laws and recommended best practices.

On the heels of related lawsuits, the New York Attorney General’s Office launched an investigation last week, and sent inquiries about debit card payroll practices to many large employers.  The AG’s office requested documentation proving that employees gave explicit consent before being issued payroll debit cards in lieu of their pay.  The AG’s office is also investigating fee schedules, whether the fees were fully disclosed to employees, and exactly how much in fees was paid. 

What Are Payroll Debit Cards and Why Do Employers Use Them?

The payroll debit card concept is straightforward.  Rather than getting paid through a live check or direct deposit, employees receive their payments on a debit card.  Employees can then use that card like any other debit card and make purchases, or can go to a bank or ATM to withdraw money.  According to a recent New York Times report citing the research firm Aite Group, more than 4.6 million Americans are paid with debit cards.  That number is projected to grow to 10.8 million by 2017. 

Using payroll debit cards can help an employer save money associated with distributing and mailing paper checks.  While businesses have preferred direct deposit over checks for this reason, direct deposit cannot work if the employee does not maintain a bank account.  Payroll debit cards help bridge this gap.  Moreover, payroll debit cards can increase the security and reliability of distributing wages, and also help ensure compliance with state laws related to pay, for example with legal requirements concerning the timeliness of termination pay.   

Payroll debit cards can also benefit employees, as they permit those who do not have bank accounts to bypass check-cashing services.  Notably, the fees associated with prepaid cards tend to be smaller than what employees would have to pay to a check cashing service. Payroll debit cards also provide employees who do not have checking accounts or credit cards the ability to make purchases or pay bills by phone, online, or mail.

Despite these benefits, payroll debit cards carry some downside for employees.  For example, many payroll debit cards are structured so that the cardholder pays fees on common transactions such as ATM withdrawals, balance inquiries, and even penalties for periods of inactivity.  These income-reducing fees have sparked interest from state agencies, the plaintiff’s bar, and the national media.    

California’s Take on the Use of Payroll Debit Cards

Many states have statutes, regulations, or administrative policies that govern the use of payroll debit cards. 

While California does not have any laws or regulations specifically regarding payroll debit cards, at least one federal court in California has held that a company’s payroll debit card program was compliant with California’s existing labor code sections dealing with payment of wages.  That case is styled Holak v. Kmart Corporation, et al, No. 1:12-CV-00304 AWI MJS, 2012 WL 6202298, at *7 (E.D. Cal. December 12, 2012).  In it, the district court looked at opinion letters issued by the California Division of Labor Standards Enforcement (“DLSE”) on the subject as a source of persuasive authority.  In two such letters, the DLSE opined that payroll debit card programs do not violate the Labor Code where the employees are fully informed of the service and it is represented as an alternative method for wage payment for which their participation is optional.  The DLSE also noted that California’s strong public policy of favoring the prompt and full payment of wages can be satisfied by providing for at least one transaction per pay period without fee.  Because the plaintiff had the option of being paid by direct deposit or payroll debit card, was made aware of the transactional fees that were associated with the payroll debit card, and was provided at least two ways to withdraw her entire paycheck on demand without incurring any fees, including by going to a bank and withdrawing the funds from a teller, or by using a free pre-check to write herself a check and cashing it at a certain bank, the Court held that the plaintiff could not state a claim for violation of the California labor code.

Payroll Debit Cards – Best Practices

Now is a good time for employers to take stock of their payroll debit card programs.  While companies should carefully review their payroll debit card programs and practices with an attorney to make sure they comply with all applicable federal and state laws, the following list of best practices may be helpful:

  • Make payroll debit card programs voluntary, and ensure that consent is not a condition of employment.
  • Have employees opt into the program (as opposed to automatically enrolling them, and having them opt out), and get their consent in writing.
  • Make sure fees have been fully disclosed to employees.  In addition to passing out information before employees sign up for the program, consider making the fees and other features of the debit card available online or elsewhere for the employee to access easily at any time.
  • Ensure that the payroll card account allows at least one free withdrawal during each pay period, and that the employee may withdraw his entire paycheck at this time.  Note that state law may differ on this and other practices.  For example, at least three free withdrawals per pay period are required in Vermont.
  • Permit employees the option to discontinue the use of payroll debit cards at any time without penalty.
  • Keep employees apprised of any changes to the terms and conditions of the payroll card account, including any changes in the fees associated with the card.
  • Consider conducting audits regularly to ensure that fees do not cause employees to make less than minimum wage.
  • Educate employees through trainings and brochures on how to use payroll debit cards and minimize fees.
  • Decline any bonuses or other remuneration from financial institutions for the use of payroll debit cards.
  • Research and partner with financial institutions that offer a favorable fee schedule and benefits for your employees.