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For quite some time, employers striving for 100 percent electronic wage payment have provided payroll cards—which work like debit cards—to employees who either cannot or will not open a bank account to enable direct deposit. Now, however, the use of these pay cards and the fees charged by banks that issue them are under scrutiny from many parties, including the New York state attorney general and plaintiffs in class-action lawsuits. In this environment, are pay cards still a viable tool for companies?
While there is probably no way to completely inoculate a pay-card program from legal challenges, employers can take steps to mitigate the risks of one. After all, bypassing pay cards does not necessarily protect workers from fees. “Remember, if employees without a bank account are paid by check, they can still be vulnerable to the fees charged by check-cashing agencies,” said Maxine Neuhauser, an attorney at law firm Epstein Becker Green in Newark, N.J. “If [employees] do not qualify for free checking accounts, pay cards can be a good option for some employees.”
Why Pay Cards?
Electronic wage payment is common around the world. In most countries, except the U.S., having a basic bank account into which wages are deposited electronically is almost universal. “The high usage of electronic wage payment in other countries is generally because of legislative requirements, rather than individual employee choice,” said Felicia Cheek, global payroll advisory program practice leader at The Hackett Group in Atlanta.
In the U.S., however, electronic payment via bank direct deposit is not standard practice because a significant portion of the population does not qualify for a bank account or chooses not to open one. These so-called unbanked individuals must be paid by other means, such as a paper check or through a pay card that is reloaded each pay period, allowing employees to use them like a bank debit card. The controversy over pay cards stems from the fees banks often charge for pay-card withdrawals, replacing lost cards and other reasons.
The push for electronic wage payment is rooted in companies’ desire to eliminate the costs of generating, processing and reconciling checks. However, other factors have driven the move to electronic wage payment. “In a disaster-recovery or business-continuity situation, for example, electronic payment and pay cards are the easiest way to make sure the organization can pay all of its employees in a timely manner,” said Cheek.
Proceeding with Caution
As the spotlight on pay-card fees intensifies, it is a good idea to take a close look at pay-card programs and identify any weaknesses and need for potential changes. It is also advisable to confer with legal counsel on these issues.
Compliance. Like many payroll-related issues, what employers can and cannot do with their pay-card programs is shaped by federal, state, and local laws and regulations. At the state level, in particular, there can be an array of legal and regulatory requirements for employers that want to use pay cards. Some states require businesses to obtain employees’ consent, often in writing, to provide their compensation via pay card, while others allow pay cards to be the default payment option unless workers opt out. Similarly, some states require that banks issuing pay cards allow employees to make a full and immediate withdrawal of accumulated funds without incurring a fee.
Given the legal action around pay cards, it would not be surprising to see states curb allowable pay-card fees or make other changes to their use. Considering this possibility, plus the inevitable additional scrutiny of pay-card programs by employees and consumer advocates, employers may want to consider going above and beyond the law’s requirements in certain areas. For example, even if a state law allows a pay card to be the default method for paying employees, companies may want to change their program to opt-in.
Fees associated with payroll cards can include:
Communication. Unpleasant surprises with pay-card fees are one of the best ways to alienate employees and make them suspicious of a pay-card program. “Sometimes employers might not realize that people just don’t understand what the card is” and what it is for, said Neuhauser. “It is not a gift card” that people can use wherever they want without any fees. If workers don’t realize that, they are more likely to be surprised and upset by the fees.
That is why it is important to provide:
Businesses that offer either direct deposit or a pay card have an opportunity to remind employees that they have the option of opening a bank account. Employers can pair this communication with information about available bank-at-work programs and local credit unions that might be available for those who have been unable to open a bank account elsewhere.
Consent. If an employer is facing legal action related to pay cards, one of the first things it should consider is whether employees had to consent to being paid via pay card and what that consent involved. “It is powerful for an employer to present a signed consent showing that the employee has chosen to be paid [with a pay card] and that the consent form is clear and written in plain English,” advised Neuhauser. “This form can also state that consenting to be paid by pay card is not a condition of employment, that employees have been provided with a list of fees associated with the pay card and that they have been told they can withdraw their wages in full without incurring a fee, with instructions on how to do it.”
Compare. Like all services, pay-card programs must be benchmarked against the current marketplace. Organizations should shop around their programs to see what rates are competitive and to make sure that their programs compare favorably with what’s available from other vendors.
Legal actions could put pressure on pay-card vendors to make changes to their fee structures and rethink the fees they charge. If employers scrutinize user fees and make them a key consideration when choosing a service provider, those vendors might be more willing to make concessions.
If employers are concerned about potential legal action resulting from a pay-card program, they may be less willing to take a chance on one. Clearly, vendors have an interest in making sure that companies remain comfortable providing pay cards and that employees are satisfied receiving their pay in this form.
Joanne Sammer is a New Jersey-based business and financial writer.
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