Bad news for employers using payroll cards to pay their employees: A federal regulator is now saying employers can’t require employees to use them, and must offer an additional payroll option as an alternative, according to the Wall Street Journal.
Pay cards are an increasingly popular way for employers to handle payroll. What’s the big attraction? For employers, the cards can be a less expensive payroll method than paychecks or direct deposit. And for employees who are among the 10 million households who don’t have a relationship with a bank, it’s an easy way for them to receive their pay.
But the downside of pay cards—and what has prompted the U.S. Consumer Financial Protection Bureau (CFPB) to start paying attention—are the hefty hidden fees. A Forbes article reported that one card issuer charged $1.75 for ATM withdrawals, $2.95 for paper statements, $6 for paper statements, and $7 for inactivity. Those costs could certainly eat into a paycheck, particularly for low wage earners.
In my opinion, pay cards aren’t necessarily a bad thing, and may be a great option for some businesses and employees in terms of convenience. And as a small business owner, I’m all for finding ways to save on payroll—but not when it hurts my employees.
This whole issue came to light when an employee of a McDonald’s franchise filed a class-action lawsuit against their employer after finding the only pay option was a bank-issued pay card. According to Richard Cordray of the CFPB, employees shouldn’t have to pay to receive their wages—they must be given options.
The Electronic Fund Transfer Act requires employees to have a choice where their money is deposited. Employees receiving pay cards are entitled to the following additional protections:
- Disclosure of fees in writing;
- Access to their account history;
- Limited liability for unauthorized users if fraud is reported within a certain time frame; and
- Resolution of errors by the financial institution.
In my company, my employees receive their pay through direct deposit and have access to an online employee portal, where they can direct their pay into as many accounts and institutions as they choose. This is also a simple way to encourage the habit of saving.
The CFPB has sent warning letters to employers and members of the industry, and plans to use its authority to enforce the law. The message is clear: Employers need to give their employees options when it comes to getting paid. If they’re not following the law, they may be asking for trouble. If employers do choose to offer pay cards, they should carefully evaluate this option and make sure it’s in the best interest of their employees.