Payroll Cards: Issues for Employers
Banks and other payroll card companies might be telling you that a payroll card program will save you the cost and inconvenience of issuing and delivering paper checks. Whether payroll cards will work well for your employees depends on the details of the payroll card program you choose. These card programs vary widely in terms of the cost, convenience, and level of consumer protection for your employees. Here are some steps you can take in choosing a payroll card to make the card a good for both you and your employees.
1. Don’t use a payroll card vendor unless you know it is financially sound. Some payroll cards are issued by banks. Other payroll card issuers are non-banks. If you use a payroll card company which goes out of business, your employees could lose the pay which is still on their payroll cards. Since you selected the issuer, your employees may expect you to make up these losses.
You might pay a bit more to arrange for a payroll card through a bank, but it is worth it. If you use a bank that sets up the program with FDIC insurance, you avoid the risk that your employees could lose some of their money if the payroll card issuer goes out of business.
2. Use your contract with the issuer to require consumer protection equal to bank debit cards. Payroll cards established by employers to deliver recurring wages, salary, or other employee compensation have the same protections that apply to bank debit cards as those under the federal Electronic Fund Transfer Act and federal Regulation E since July 1, 2007. They include the right to get funds “recredited,” that is, returned to the account, within 10 business days after a theft or error, unless the bank can show within that time frame that there was no theft or error. The federal protections also restrict the amount of loss when the card is stolen.
The voluntary VISA and MasterCard “zero liability” policies can’t replace a guarantee of federal Regulation E protection. The voluntary policies don’t cover the all of the circumstances where federal law provides protection. For example, MasterCard’s policy does not apply if there are two or more instances of theft or unauthorized use of a card in one year. VISA’s policy does not apply when the card is used at an ATM. Visa’s policy also does not apply if the card is used “outside the VISA system.” Retailers can choose whether to process a card payment on the VISA network, or on another network. If your employee has his or her payroll card stolen and used at an ATM or used outside the VISA network, the VISA zero liability policy will not apply. If your employee has his or her payroll card stolen and the card is fraudulently used three times in one year, the MasterCard zero liability policy will not cover all three thefts. Make sure your payroll card contract gives your employees who hold payroll cards with full federal Regulation E protections.
3. Pay the monthly fee or negotiate a contract with the issuer that there will be no monthly fee. Choose a card issuer with wide access to no-surcharge ATMs for your employees. Payroll cards save employers money. Banks offer payroll cards partly to get and keep a larger relationship with your company. You can negotiate for a payroll card for your employees with no monthly fee on the employee, or with a lower monthly fee. You can also choose to pay any monthly fee associated with the payroll card. Some state laws require that employees be able to get their pay without having to pay a fee.
The number and location of ATMs where the payroll card can be used without a surcharge also will affect the cost of the card for your employees. The contract should list the ATMs that will be available without a surcharge.
4. Identify and restrict the fees to employees in your contract with the issuer. Be sure your contract lists all of the fees that can be charged to your employees. Your contract should say that no fees can be added or increased without your approval, including fees that will be paid by the employees. The cost of payroll cards can vary widely, depending on the types and amount of fees. A low-fee card can build employee loyalty and boost morale. If you don’t control the fees in your contract with the payroll card issuer, what looked like a good product can become a burden on your employees.
Don’t assume that all payroll cards cost about the same. Comparison shopping on your part can help your employees access their pay without high fees. Payroll card issuers charge a wide variety of fees, including:
• a monthly fee,
• a fee after a certain number of transactions,
• a fee for each ATM transaction,
• surcharge to the ATM owner,
• a POS fee for use at a point of sale such as a store,
• an inactivity fee,
• a fee to replace the card,
• a fee when funds are put on the card (load fee), and
• a fee to get the funds out by check if the employee doesn’t like the card.
One payroll card provider’s website even says it charges a per-minute fee to speak to customer service. Not all payroll cards charge all of these fees.
Be sure that the promotional material you receive from the payroll card issuer includes the fee schedule, so that employees can see all the fees before they decide whether to agree to a card.
5. Check whether the card gives your employees money management choices, such as a direct debit to pay regular bills, or a direct transfer every month into a savings account. Some cards offer this feature, others do not.
6. Can the account be overdrawn, and if so, what happens? Some cards are set up so that they can’t be used if there is no money in the account. Taking out more than is available on the card, called an overcharge, can happen when cards can be used with a signature. Cards can also be overdrawn if an ATM rounds up to the next $20 amount for withdrawal. An employee who makes a $20 ATM withdrawal when he or she has $16 left in the account could face a very high overcharge fee. Those few extra dollars could trigger a $29 overcharge fee for the employee. High overcharge fees can give payroll cards a bad reputation with your employees.
7. Give employees a choice. Bank accounts are a good choice for most consumers, but employees should never be required to deal with a bank in order to be paid. A choice only between direct deposit and payroll cards is not enough of a choice. Some employees can’t get bank accounts, because of prior problems managing an account. Those employees won’t have a choice unless they can choose a paper check. Employees should always be offered the choice of receiving a paper check. If your employees can decline to use the payroll card program, this should give the bank or other payroll card company a greater incentive to provide your employees with a good payroll card product, reasonable fees, and good customer service.
8. Require protections for your employees’ financial information in the payroll card contract. Your payroll card contract should prevent the card issuer from using, sharing with its affiliates, or selling or trading any information about the employee. The contract should say that the card issuer can’t use or sell information about where or when the employee uses the card. The contract also should say that the issuer can’t tell the employer where and when the card was used, so that you can tell your employees that the card is private.
9. Make the payroll card a first step toward improved financial stability for your employees. Employers and banks could make payroll cards better for employees. Ask a bank that wants you to use its payroll cards to help your employees in these additional ways:
• Offer checking accounts and checking-type accounts with debit cards plus low-cost money orders to all employees who are offered the payroll card. This may help your employees to move into the traditional banking system.
• Waive barriers to opening checking accounts, including a listing in ChexSystems or a similar service for prior problems with a checking account, for all employees who successfully manage a payroll card for one year. This may help your employees move from the payroll card to a full bank account.
• Offer savings accounts to every employee who uses a payroll card. This may help your employees build toward the personal financial stability that comes from having an emergency savings fund. If you join with a local program for individual development accounts, your lowest wage employees could even get matching dollars for their savings.
• Offer low cost ways to send money out of the U.S. using the payroll card. Employees who send money to relatives in other countries may spend significant fees for money transmission. You can help your employees save money and build employee loyalty by offering a payroll card that that allows the employee to get an extra card, set aside part of the paycheck in an account accessed by that extra card, and send that extra card to relatives outside the U.S. for use at an ATM.
• Offer low cost money orders or other ways to pay bills with the funds on the payroll card. Many landlords do not accept debit card payments.
10. Choose a payroll card that does not encourage your employees to borrow from future paychecks. A few payroll cards allow for payday loans or cash advances from future paychecks that have not yet been made. These are a very expensive way to borrow money. Payday loans and cash advances get consumers on a debt treadmill that is very hard to escape. A small number of bank and nonbank payroll card issuers allow high cost payday loans, where funds can be spent or withdrawn before they are earned. Your contract for the payroll card should say that payday loans and cash advances cannot be offered with the card.
11. Will your employees be able to receive all card information, and telephone customer service, in a primary language other than English? If the payroll card issuer offers promotional material about the payroll card in languages spoken by your workforce other than English, be sure that the issuer gives you and your employees all of the information in that language, including the fee schedules and cardholder agreement. Ask the payroll card issuer what languages customer service will be provided in. If many of your employees have a primary language other than English, you should shop for a payroll card company that offers telephone customer service in that language.
**This information is provided by Consumers Union of U.S., Inc to improve the consumer-friendliness of payroll cards. This is not legal advice. Consumers Union does not give legal advice to individuals or to employers.
**Prepared March 2004. Updated October 2007.
Consumers Union of U.S., Inc.
West Coast Regional Office
1535 Mission St.
San Francisco, CA 94103