Vol. 48, No. 4
Employers cut expences by shifting from paper paychecks to payroll debit cards.
The Dallas city government doesn’t issue paychecks anymore. All 13,000 city employees are paid by electronic means—either through the familiar arrangement of direct deposit to a bank account or by the newer method of deposit to a personal account set up by the employer and accessed by the employee with a debit card.
In its effort to shift employees away from costly paper paychecks, Dallas has joined the ranks of employers ranging from giants—Sears, Office Depot, Chicago’s public school system—to small firms with a few hundred on the payroll. Like many employers, Dallas seeks to cut payroll costs by steering paycheck employees to a cheaper, faster—and perhaps safer—way to convert their earnings to cash.
The decision to have all employees paid by electronic means effective this past March will save the city about $150,000 annually in check-distribution costs and will free up human resource staff time as well, says Drew Corn, a financial services manager for the city. Distributing paper checks “was very labor-intensive” for HR, he says. Although nearly 90 percent of Dallas’ city employees are paid via direct deposit, “our overriding goal is to get 100 percent,” says Corn. “But we understand that not everybody can get a bank account,” he adds.
And that’s where debit cards play a role.
Payroll debit cards can be particularly useful for employees who don’t have bank accounts. These so-called unbanked workers include members of the 12 million or more U.S. households in which no one has a bank account—an estimate by Visa U.S.A. They also include others, such as teenagers with part-time jobs but with no bank accounts yet.
For example, Cutting Edge Pizza LLC, a Hartford, Conn., company that operates Little Caesars franchises in six states, has “a lot of high school kids and younger workers,” says Rita Viviano, human resource director. Most don’t have bank accounts, and some lack identification because they don’t have driver’s licenses. They like getting paid via debit card, she says, because then they can “go to the mall and spend it.”
All payroll debit cards can be used in automated teller machines (ATMs), and some cards are accepted by retailers. Generally the cards can be used only with a personal identification number (PIN), but cards that are branded with the Visa or MasterCard logo can be used without a PIN.
A major plus of a payroll debit card for unbanked workers is the ability to get cash without resorting to check-cashing services, which charge up to 6 percent of the face value of a paycheck, according to the San Antonio-based American Payroll Association, an organization of payroll professionals. Some check-cashing fees may be even higher. Any debit card fees paid by the employee are almost certain to be lower than check-cashing fees, and funds are available immediately on payday anywhere in the world.
Moreover, some say, tapping a payroll debit card for cash may sometimes be safer than cashing a check. Some Dallas city employees, for example, have been robbed after leaving check-cashing services, says Corn.
The principal risk for employees in being paid by debit card is that a misplaced or stolen card that’s usable without a PIN might be drained of its balance before its loss is reported. But debit card providers generally don’t hold consumers liable for such losses.
The Matter of Fees
Debit cards are “less expensive than paper checks” for employers—even when some card fees are paid by the employer, says James Medlock, a senior director of education at the payroll association.
Video retailer Movie Gallery, based in Dothan, Ala., does not pass on monthly fees to employees and permits two free ATM withdrawals per pay period—and still is saving about $160,000 per year since initiating an electronic payment program that includes debit cards. Movie Gallery’s savings result from eliminating overnight mailing charges to get checks to its 14,000 employees in 43 states and Canada.
Similarly, the city of Dallas is saving almost the same amount while it splits fees with employees, paying the monthly maintenance cost for each debit card account and letting employees withdraw funds twice per pay period from ATMs without charge.
Paychex Inc., a payroll and benefits services company in Rochester, N.Y., that offers the Paychex Access Visa card, charges a $3 monthly maintenance fee and $1.50 for each ATM transaction in addition to any fee charged by the ATM. There are no fees when the card is used to make a purchase.
Paychex’s fees are much lower than what employees would pay to cash their checks at a check-cashing service, says Diane Rambo, vice president of human resource services. For example, a worker who cashed four $100 paychecks a month and paid a 6 percent fee each time would spend $24. But the fees for getting cash four times in one month from a debit card would total $9.
That assessment is echoed by Viviano at Cutting Edge Pizza. The company started offering the Paychex card last July, and about 85 of its 700 employees now use it.
The company picks up none of the fees. Employees are charged $2 a month to maintain the card and $1.50 for each ATM transaction.
Pay Stubs and Persuasion
Whether to absorb debit card fees or pass them on to employees is just one of several decisions a company must make in considering whether to offer such an option. Debit cards’ features and fees differ from vendor to vendor, says Medlock. “Each one does it differently, and a company should research to find the best one for it.”
Generally, accounts for debit cards belong to the company that establishes them, while the funds belong to the employee, says Medlock. Each account set up with a bank is federally insured up to $100,000, just as other bank accounts are. If an employee with a payroll debit card account leaves the company, Medlock explains, the account remains open until the funds are withdrawn. He notes, however, that most states require that unclaimed wages pass to the state after one year, so a former employee who neglects to withdraw all funds risks forfeiting them.
Paychex works with Bank One to set up accounts for employees. If the employee leaves the company, Paychex terminates the account and sends the employee a check for the balance.
Methods of providing pay stubs also vary. Employees using a Paychex system receive a paycheck-like form stamped “non-negotiable” (the net pay is already in the employee’s account) plus a pay stub showing deductions and other information.
Even when pay stubs are mailed, their distribution costs are far below those of paychecks, which require special paper and often are sent overnight. Some companies e-mail stubs to branch offices for managers to print out and distribute. Others, like Movie Gallery, enable individual employees to download and print their own stubs at work. In addition, employees with payroll debit cards typically receive monthly statements of their account activity.
Although such details about debit cards may vary, some things are not negotiable. For example, many states require that employees be given at least one no-fee means of getting cash for their earnings. A paper paycheck meets that requirement, Medlock notes, even if the employee pays a fee to a check cashing service. Employers usually provide one or two free cash withdrawals per month to employees paid via debit cards.
Moreover, in most states, private employers cannot force current employees to change the method by which they’re paid, though generally a company can make electronic payment a condition for employment for new employees. (Although Texas prohibits private employers from requiring employees to make a switch, the city of Dallas concluded, with the support of its legal counsel, that as a public employer it was not subject to the prohibition and thus could require that all employees be paid electronically, says financial manager Corn.)
Selling the Future
Payroll debit cards and direct deposit are just the latest chapters in the ongoing evolution of payroll practices, says Medlock. “Forty or 50 years ago people were paid in cash. Then paper checks became the dominant form of payment in the 1970s. Now employers are moving to a paperless system.”
But getting employees to go along with the trend can be a hard sell, says Paychex’s Rambo. Jim Pongonis, vice president of human resources at Movie Gallery, says: “One of the biggest problems I had was education. People don’t like change.”
At Movie Gallery, the move from paper to electronic payment is being made with a twist. Since October, all employees are paid via debit card unless they opt for a check or direct deposit. “We’re trying to get to a paperless payroll,” says Pongonis. Debit cards help toward that goal because the vast majority of Movie Gallery’s part-time employees do not have checking accounts. Moreover, in New Hampshire, Virginia and West Virginia, states that let employers mandate a means of payment, all Movie Gallery employees are required to pick an electronic method.
Pongonis advises HR professionals considering debit cards to advertise their advantages for employees far in advance of putting them in place. One reason the switchover has gone smoothly in Dallas, says financial services manager Corn, is that the debit card concept was unveiled—and promotion began—a year before electronic payment became mandatory, prompting many employees to sign on long before the deadline.
Elayne Robertson Demby is a freelance business writer in Weston, Conn.