This practice note outlines key considerations for lawyers to adopt when advising employers on the use of payroll card programs as an alternative method of paying employees. The practice note covers the following key issues concerning payroll cards:

• What are payroll cards?
• Federal restrictions on the use of payroll cards;
• Common requirements under state wage and hour laws;
• Pros and cons of using payroll cards; and
• Best practices for establishing and maintaining payroll card programs.

What are Payroll Cards?

Payroll cards — also known as payroll debit cards or paycards — are similar to bank debit cards. They are an increasingly popular method for employers to pay wages because they reduce the administrative costs associated with the processing and distribution of live, paper paychecks. Payroll cards can also be attractive to employees, as payroll cards eliminate the hassle and monetary cost sometimes associated with cashing live paychecks.

In a typical payroll card program, the employer chooses a bank or financial institution to issue payroll cards. Employees who opt for this method of payment establish payroll card accounts with that financial institution. Employers add wages to the payroll cards each pay period. Employees may then use the payroll cards for ATM withdrawals, bank teller withdrawals, debit card purchases and “cash back” withdrawals.

As with other bank accounts, banks sometimes charge fees for the maintenance and use of payroll card accounts. These fees have been the subject of a few recent wage and hour cases, and pose some risks for employers who wish to use payroll cards.

Case Law

For example, in Holak v. Kmart Corp., 2012 U.S. Dist. LEXIS 176331, at *4-5 (E.D. Cal. Dec. 12, 2012), plaintiff Amie Holak sought to bring a class action suit against Kmart alleging, among other things, that:

• She and other putative class members were required to participate in a payroll debit card program if they did not elect to participate in direct deposit;
• Kmart charged unauthorized transaction fees for the use of payroll debit cards and deducted said fees from their wages; and
• She and other putative class members could not withdraw all of their wages in a single transaction and incurred transaction fees with every ATM withdrawal after the first one in a given pay period.

Holak and other putative class members claimed Kmart violated California Labor Code §§ 212 and 221 by taking unlawful wage deductions and unlawfully discounting their wages. Id. at *11. Kmart successfully moved to dismiss Holak’s claims on the grounds that:

• Participation in the payroll debit card program was optional;
• The terms and conditions, including the fee schedule, of the program were provided to participants; and
• The payroll card program provided two ways for participants to withdraw their entire paycheck on demand without paying any fees.

Id. at *16-20. Although Kmart successfully defended the use of its payroll debit card program, this case illustrates the need for employers to consider all aspects, including the assessment and disclosure of transaction fees, when deciding to implement a payroll card program.

Likewise, in Ortiz v. Randstad North America LP, 2015 U.S. Dist. LEXIS 30660, at *6 (N.D. Cal. March 12, 2015), plaintiff Adan Ortiz alleged Randstad owed him the full amount of his minimum wage because its payroll debit card program — which allowed for the imposition of transaction fees — did not comply with California Labor Code § 212. Randstad successfully moved for summary judgment relying on evidence that:

• Its payroll debit card program allowed participants to obtain their wages at a number of locations, including “VISA-issuing banks;”
• Randstad provided details, including when and how fees were imposed, in a “welcome kit” to the participants in the payroll debit card program;
• Participants in the payroll debit card program received an itemized wage statement in the form of a “paystub;” and
• Participants could make one transaction per pay period without incurring a transaction fee.

Id. at *8-10, 13. In addition, Randstad introduced evidence showing that Ortiz had used his payroll debit card on “hundreds of occasions” to obtain his wages without incurring any transaction fees. Id. at *10, 13.

Best Practices - Fee Disclosures

As noted from the cases above, fee disclosures are critical to minimizing the risks involved in implementing and maintaining payroll card programs. When advising employers on a particular payroll card program, you should pay special attention to the fee schedule that the card issue provides, as many fees are not always obvious. This is especially true concerning:

• Balance inquiry fees;
• Fees for adding money to the card or “loading” fees;
• Out-of-network ATM fees;
• Fees based on caps on the number of uses of in-network ATMs;
• Overdraft or denied transaction fees; and
• Other miscellaneous fees such as fees for:
• Online purchases;
• Receiving paper statements;
• Using a check to obtain wages instead of the card;
• Inactive cards; or
• Replacement cards.

You can best handle these risks by ensuring the contract you negotiate with the card issuer specifically identifies all of the types of fees that the card issuer may charge. Also, to further minimize the risks that transaction fees pose, you should ensure that the card issuer cannot add or increase fees without prior written approval from the employer.

As explained in the sections below entitled “Federal Restrictions on the Use of Payroll Cards” and “Common Requirements under State Wage and Hour Laws,” the use of payroll cards is governed by a patchwork system of federal and state laws. More states are introducing new regulations each year.

Federal Restrictions on the Use of Payroll Cards

The FLSA

The Fair Labor Standards Act requires employers to pay minimum wages and overtime wages to certain types of employees. See 29 U.S.C. § 201 et seq. The FLSA is silent on the manner in which wages must be paid other than to say that wages must be paid “finally and unconditionally or ‘free and clear.’” 29 C.F.R. § 531.35. Wages are not paid “free and clear” if the employee is required to “kick back” a portion of the wages to the employer. Id.

The FLSA does not specify whether wages should or may be paid pursuant to check, direct deposit or payroll card. However, any mechanism that requires the employee to bear administrative costs associated with the processing of payments may violate the FLSA if the imposition of fees results in the employee being paid less than the minimum wage for all hours worked, or less than the full amount of overtime wages due.

For more information on the FLSA’s minimum wage and overtime requirements, see the practice notes entitled Navigating the FLSA’s Minimum Wage Requirements and Complying with the FLSA’s Overtime Requirements for Hourly Nonexempt Employees in the Wage and Hour Compliance topic in Lexis Practice Advisor’s Labor & Employment offering.

Regulation E of the Electronic Funds Transfer Act

The Electronic Funds Transfer Act is a 1978 federal law that governs electronic banking transactions. See 15 U.S.C. § 1693, et seq. In 2006, Regulation E, which implements the EFTA, was amended to apply to “payroll card account[s].” See 15 C.F.R. § 205 et seq.

In 2013, the Consumer Financial Protection Bureau issued guidance explaining Regulation E’s application to payroll cards. See CFPB Bulletin 2013-10. As explained by the CFPB, Regulation E covers payroll card accounts if they are “operated or managed by the employer, a third-party payroll processor, a depository institution or any other person.” Id.; see also 12 C.F.R. § 1005.2(b)(2).

Regulation E prohibits employers from requiring that employees accept payment by payroll cards issued by a financial institution that the employer selected. See 15 U.S.C. § 1693k(2); 12 C.F.R. § 1005.10(e)(2) and comment 10(e)(2)-1. Regulation E does permit employers to offer employees the choice between payment by payroll card and payment by some other means. Id. Therefore, an employer payroll card program run by a financial institution of the employer’s choosing is lawful so long as the employer provides employees the choice of accepting payment of wages by other means, such as a physical paycheck.

Regulation E provides various “protections” for those employees who receive wages on a payroll card including, but not limited to:

• Requiring that the financial institution make certain disclosures to payroll card users, including disclosures about fees;
• Requiring that employees have access to information about payroll card balance and account history; and
• Mandating that financial institutions provide Federal Deposit Insurance Corporation protection to payroll cards, as well as protection from fraudulent charges 12 C.F.R. §§ 1005.7, 1005.9(b), 1005.18(b) and (c).

The 2013 CFPB guidance noted that while the EFTA and Regulation E preempt state laws that conflict with EFTA and Regulation E, nothing prohibits states from enacting laws or regulations that offer more protection to employees than the protections provided by EFTA and Regulation E. See CFPB Bulletin 2013-10.

Common Requirements Under State Wage and Hour Laws

State law generally governs the manner in which wages must be paid, since the FLSA is silent on this issue. No states have passed legislation outlawing wage payment by payroll cards. Over 20 states have enacted laws regulating the use of payroll cards. Generally speaking, state law regulations of payroll cards are similar to state laws regarding payment by direct deposit. These laws supplement and in some cases offer greater protection than Regulation E.

For example, most states (including, among others New Jersey, N.J.A.C. § 12:55-2.4(i)(1); Vermont, 21 V.S.A. § 342(c)(2); and West Virginia, WV Code § 21-5-3(b)(3)) allow employers to pay wages via payroll cards only if employees first consent, usually in writing. Some states (e.g., North Dakota, N.D.C.C. § 34-14-02; Utah, Utah Code § 34-28-3(1)(e)(iii); and California, Cal. Lab. Code § 213(d)) require employers to allow employees to choose the financial institution associated with the payroll card account. And some states (e.g., Maryland, MD Code Ann. Lab & Empl. § 3-502; Tennessee, Tenn. Code Ann. § 50-2-103(e)(D)(2); New Hampshire, N.H. Rev. Stat. Ann. § 275:43, II.(a); and Nevada, NAC 608.135(2)(b)) mandate that employers disclose to employees any fees associated with payroll card accounts. For more information on state method of pay laws — including information on state payroll card laws — see the Pay Timing, Frequency, Methods and Deductions column of Chart — State Practice Notes (Wage and Hour Compliance) in the Jurisdictional Considerations topic in Lexis Practice Advisor’s Labor & Employment offering.

Consider State Breach of Contract Claims for Unpaid Wages

The FLSA regulates only overtime wages and minimum wages. It does not, for example, require that employers pay employees’ agreed-upon “straight time” wages. However, employees sometimes bring state law breach of contract claims for “unpaid wages” if payroll card fees have the effect of reducing the hourly wage “earned” by employees. To combat this risk, you should advise employers to ensure that employees have the right to access and withdraw — at least once per pay period — the total amount of wages deposited into their payroll card account.

New York and Pennsylvania Payroll Card Laws Enacted in 2016

New York’s Payroll Debit Card Regulations

In September 2016, the New York State Department of Labor issued regulations governing payroll debit cards. The regulations are effective on March 7, 2017. The regulations do not apply to employees subject to the executive, professional or administrative exemptions who make more than $900 per week or farm employees who do not work in a factory. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-1.2(e); N.Y. Lab. Law § 192(2).

A New York employer must obtain an employee’s written consent and provide the employee with a written notice of rights at least seven business days prior to issuing the first payment of wages by payroll debit card. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(a). The written notice and written consent may be given and received electronically. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-1.3(c).

When paying the employee by payroll debit card, the written notice of rights must include:

• A plain language description of all employees’ options for receiving wages (including cash, check, direct deposit and payroll debit card);
• A statement that the employer cannot require employees to accept payment of wages by payroll debit card (or direct deposit);
• A statement that the employer may not charge employees any service fees for access to their full wages; and
• A list of locations where employees can access and withdraw their wages for no charge within reasonable proximity to their residences or place of employment.

N.Y. Comp. Codes R. & Regs. tit. 12, § 192-1.3(a).
Before New York employers can pay employees by payroll debit card, they must ensure that there is:

• Local access to one or more automated teller machines that offers withdrawals at no cost to the employees; and
• At least one method of withdrawing the total amount of wages for each pay period or balance remaining on the payroll debit card without employees incurring a fee.

N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(b). New York employers may not pay employees by payroll debit cards unless the funds on the card never expire. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(f).

New York employers cannot charge employees any fees for using payroll debit cards. Such prohibited fees include: (1) point-of-sale transactions; (2) overdraft; (3) account inactivity; (4) maintenance; (5) telephone or online customer service; (6) balance inquiries; and (7) providing employees with written statements, transaction histories or the issuers’ policies. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(c).

New York employers may not pass any costs associated with the payroll debit card account onto employees, nor may they receive kickbacks from issuers or third parties for using payroll debit cards. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(e). They are also forbidden from using payroll debit cards that are linked to any form of credit. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-2.3(d). They may not engage in unfair or deceptive practices in relation to the method of the payment of wages. They also cannot terminate, penalize or discriminate against employees who have not agreed to obtain their wages through payroll debit card, nor can they condition the hiring or continued employment of any employee on them agreeing to payment by payroll debit card. N.Y. Comp. Codes R. & Regs. tit. 12, § 192-1.4; N.Y. Comp. Codes R. & Regs. tit. 12, § 192-1.3(b)(2).

Pennsylvania’s Payroll Card Statute

On Nov. 4, 2016, Pennsylvania enacted 2016 Pa. Laws 161, which amends Pennsylvania’s Banking Code and governs the payment of wages through the use of payroll card accounts. The law is effective on May 5, 2017.

Prior to obtaining an employee’s authorization to receive payment through a payroll card account, an employer is required to comply with stringent notice requirements, in writing or electronically. Specifically, the employer must give notice of:

• All of the employee’s wage payment options;
• The terms and conditions of the payroll card account option, including any fees the employee may be subjected to by the card issuer;
• Notice that third parties may also assess fees in addition to those of the card issuer; and
• The methods for payment available to the employee for accessing wages without incurring fees.

2016 Pa. Laws 161, §4.
Employers may not make the payment of wages or other compensation by payroll card a condition of employment or a condition of receiving a benefit of employment. Id. When an employee makes a request to change the payment method from a payroll card to another payment method (e.g., check, direct deposit, etc.), the employer must honor the employee’s request as soon as possible. Id.

Employees must have the right to make at least one withdrawal from a payroll card account up to the full amount of wages for each pay period free of charge. Id. Employees must also have the opportunity to obtain the balance on their payroll card accounts through an automated telephone system or other electronic means without charge. Id. There also may not be fees for:

• Applying or participating in the payroll card program;
• The issuance of an initial payroll card;
• The issuance of one replacement card per year upon the employee’s request;
• Transfer of wages and other compensation from the employer to the payroll card account;
• Purchase transactions at the point of sale; and
• Nonuse or inactivity of the payroll card account.

Id. Funds in a payroll card account do not expire. Id.

Pros and Cons of Using Payroll Cards

Advantages

Payroll cards can benefit both employers and their employees, as they cut down on the administrative cost and hassle of dealing with live, physical paychecks. The reduction in paper also benefits the environment.

For years employers have sought alternatives to live paychecks, because producing them can be expensive. Direct deposit of paychecks is popular, but many states (e.g., Florida, Fla. Stat. § 532.04; Montana, Mont. Code Ann. § 39-3-204(2)) prohibit employers from requiring direct deposit. The U.S. Department of Labor also takes the position that employers cannot exclusively pay wages through direct deposit. See U.S. Department of Labor Field Operations Handbook § 30c00. Using payroll cards can be another attractive way for employers to minimize payroll processing costs, particularly with respect to low-wage earners.

Also, some employees may lack the finances or credit necessary to open bank accounts to be paid by direct deposit. These employees are typically paid by live paycheck. To cash their paychecks, some employees have to wait in line and pay fees at check-cashing businesses. Payroll cards may be an attractive alternative payment option for these employees.

Additionally, payroll cards usually are FDIC-insured and offer fraud protection, which provides employees with security absent from a live paycheck.

Disadvantages

The primary drawback to employers in using payroll cards is the relative infancy of this wage-payment method. With states issuing new laws each year, it is possible that employers may unintentionally run afoul of some technical requirements and thus expose themselves to liability.

As stated above, payroll cards are an attractive option to employees who lack bank accounts for direct deposit payments. However, those employees with such bank accounts may prefer direct deposit and may find payroll cards to be cumbersome.

Best Practices for Establishing and Maintaining Payroll Card Programs

Establishing Payroll Card Programs

At the outset, you should know whether the employer’s employees are located in a state (or states) with particular payroll card regulations, and tailor their payroll card programs accordingly. You should also advise the employer to partner with an experienced payroll card vendor that is familiar with the laws in all of the states in which it operates. In general, when developing a payroll card program, you should advise the employer to strive for a program that includes:

• Offering employees the choice between being paid by payroll cards, direct deposit or live paycheck;
• Requiring employees to sign consent forms stating that the employee’s choice to be paid via payroll card is voluntary;
• Permitting employees to cancel participation in the payroll card program immediately, and at any time;
• Offering a payroll card program that permits employees to withdraw, by proximately located ATM or bank teller transaction, the full amount of their pay each pay period, with no fees charged for the withdrawal;
• Offering a “name brand” of payroll cards, such as Visa, MasterCard or Discover, issued by a reputable bank with a widely available, surcharge-free ATM network;
• Providing employees with training and easy-to-understand information on payroll card program usage;
• Ensuring that the payroll card program provides employees with a cost-free means to check their balance and account history; and
• Ensuring that employees’ payroll card accounts are protected by FDIC deposit insurance.

When establishing a payroll card program and selecting a vendor, such as a bank or other financial institution, you must take special care to research and investigate employers’ options. You must have confidence that the vendor is capable of providing competent, legally compliant services in those states in which the employer does business. Some vendors may offer monetary incentives to employees that may appear attractive. But you must keep the employer’s focus on the quality of the program as a whole, and not on the quality of the incentives that the vendor offers.

Maintaining Payroll Card Programs

The work does not stop when the employer implements the payroll card program. After the employer implements a payroll card program, you should review and audit the program at regular intervals to assess performance. You should assess, among other things, employee comments and complaints about the program, and whether the program has resulted in savings to the company. If employee participation is low, or if there are questions about employee satisfaction, you and an employer representative should meet with employees to identify and address concerns. It may be advisable to tweak or change the program, based on employee comments. In addition, because this area of the law is evolving, you should keep tabs on any developments or changes to ensure that the program remains in compliance.

Kevin E. Vance is a partner at Duane Morris LLP in Miami and Boca Raton, Florida. He focuses his practice on labor and employment litigation and other types of business litigation.

Julian A. Jackson-Fannin, an associate at Duane Morris in Miami, provided assistance with this article.

Reprinted with permission of Law360.