In a turbulent economy, employers are looking for ways to cut costs without reducing their workforces. One way to achieve this goal benefits employees, employers and the environment: paperless wage payment.
Paperless wage payment eliminates traditional paper paychecks by giving employees the choice of receiving wages by direct deposit or payroll cards. A payroll card is a prepaid, reloadable card issued by a national or regional bank on behalf of an employer.
Although most employers would like to compensate employees using direct deposit alone, many states prohibit mandatory deposit directly into an employee’s personal bank account. Moreover, a surprisingly large number of employees do not have savings or checking accounts. Because "unbanked" workers tend to come from protected minority groups, wage payment programs requiring direct deposit may run afoul of federal and state anti-discrimination statutes.
Offering employees a choice between direct deposit and payroll cards can resolve these issues because every employee can participate.
Employers and employees both benefit significantly from paperless wage payment. For employers, the benefits are largely financial and administrative. Paperless pay eliminates expenses associated with printing, processing and delivering paper paychecks.
These savings can be enormous. The Comptroller of the Currency estimates that employers can save approximately $2 per paycheck when they pay employees electronically. Agency officials also estimate that it costs $8 to $10 to replace a lost or stolen paycheck and that approximately 4 million paychecks are lost or stolen each year.
Paperless pay also eases compliance with strict wage payment statutes. For example, several states require employers to pay final wages immediately upon termination. This can be difficult, if not impossible, when terminations are unexpected.
Many employers also have difficulty delivering wages during inclement weather or natural disasters. Paperless pay allows employers to deliver wages to employees in a timely manner and to comply with statutory requirements, even when faced with unexpected obstacles.
As an added benefit, HR professionals usually see an increase in direct deposit enrollment when they roll out paperless pay.
Employees benefit from the convenience of paperless pay. Electronic payment methods provide employees with access to wages in a far safer, more secure and less expensive way than traditional paper paychecks. Employees can access wages immediately on payday, even when out of the office. They do not have to run to the bank to cash or deposit paychecks, can use their cards to make purchases—online and in person—and, depending on the program, can access wages from a number of sources, some available around the clock.
Employees without bank accounts benefit significantly from payroll cards. Studies show that 10 million to 12 million U.S. families are without checking or savings accounts. They incur high fees when cashing payroll checks and then additional costs when paying bills using money orders or traveling to a payment location to pay cash. Payroll cards allow employees to avoid these costs and provide entry to the financial mainstream.
Finally, electronic wage payment demonstrates employers’ and employees’ environmental commitment. In a 2007 study, Dove Consulting reported that paper checks use more than 674 million gallons of fuel and add more than 3 million tons of carbon dioxide to the environment each year.
Is Paperless Pay Lawful?
The benefits of paperless wage payment seem almost too good to be true, leading many employers to ask, "Is it lawful?" Increasingly, the answer is yes. Virtually every state recognizes direct deposit and payroll cards as permissible methods of wage payment as long as certain conditions are satisfied.
This was not always the case. Interest in paperless pay started to gain momentum about seven years ago. Before then, state statutes and regulations did not address modern wage payment technologies such as payroll cards. In the absence of any guidance, most employers decided against their use for fear of enforcement activity and costly litigation.
The regulatory environment has changed significantly. Fifteen states have amended their wage payment statutes or regulations to specifically address the use of payroll cards. Legislators in several other states are now considering proposed legislation and regulations.
Moreover, the wage and hour enforcement agencies in a majority of states have addressed electronic wage payment, including payroll cards, by issuing opinion letters, posting enforcement positions on their web sites or responding informally to inquiries from consumers.
As a result, the law or administrative enforcement positions in at least 21 states—Alabama, Colorado, Delaware, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, Missouri, Nebraska, North Carolina, Ohio, South Carolina, South Dakota, Tennessee, Texas, Washington and Wisconsin—can be interpreted today as allowing employers to implement purely electronic wage payment programs that offer employees a choice between direct deposit and payroll cards without also offering paper paychecks.
In the remaining states, employee participation in paperless pay must be voluntary, meaning that paper paychecks must be an option.
Most states require that certain conditions be satisfied before employers can use direct deposit or payroll cards. States typically require that employees be provided at least one means of accessing their full wages each pay period without cost. Other common conditions include requiring employers to:
- Disclose the terms and conditions of the program to employees.
- Provide employees with a statement of earnings and deductions each pay period.
- Educate employees on how the program operates.
Even in states that require voluntary participation, employers can attain a high rate of employee participation by following a carefully devised implementation strategy.
But first, members of upper management have to be on board with the switch to paperless pay. So, build a persuasive case:
Identify and quantify the value. Virtually every employer can realize savings and administrative efficiencies by going paperless. Quantifying these savings and efficiencies can be a powerful tool when selling paperless pay to members of upper management. Moreover, being able to deliver wages in a timely manner can be valuable to employers with dispersed workforces and to those operating in areas prone to inclement weather or natural disasters. Timely payment under these conditions will increase morale, reduce complaints and ease compliance with strict wage payment statutes.
Identify environmental benefits. PayItGreen, a coalition led by The Electronic Payments Association, has posted a calculator on its web site to help businesses quantify the benefits of switching to electronic wage payment.
Obtain support at the top. Buy-in from members of upper management bolsters the credibility of your proposal and reduces employee resistance. It also increases the chances that corporate leaders will invest time and resources to the project.
Start developing a strategy for paperless wage payment even as you look for a vendor, but realize that your strategy will evolve over time and with advice from the vendor.
Consider, for example, the following:
The size and geographic location of your operations will affect whether you implement your program all at once or in phases.
Your use or nonuse of electronic pay stubs for direct deposit will influence how you distribute pay stubs to employees with payroll cards.
Your geographic footprint will determine if you can offer a 100 percent electronic solution, a voluntary program or a hybrid.
You also will need to decide whether to offer branded cards—bearing a Visa, MasterCard, Discover or similar logo—or unbranded cards.
Employees using branded cards can authenticate transactions by signing for goods and services that they purchase, as they would with a credit card, or by using a personal identification number (PIN). An employee with a branded card can walk into any bank that issues that brand of card and receive full wages from the teller without fees. Unbranded cards require entry of a PIN to authenticate each transaction. They generally can be used only at ATMs and point-of-sale terminals that require PINs.
Remember, if you have union employees, you may need to bargain with union officials before implementing paperless pay. The outcome will usually depend on the terms of applicable collective bargaining agreements, so consult with counsel.
Finally, consider assigning some employees from human resources and the payroll department to pilot the program for a month to identify issues prior to rollout.
Select a Vendor
A number of banks and third-party vendors now offer paperless wage payment programs. Interview vendors to find the program best suited for your workforce. Many employers have begun to solicit information from vendors using a formal request-for-information or request-for-proposal procedure.
Develop questions for the vendors. Programs differ significantly in the type of payroll cards offered, fee structures, pay stub delivery options, customer service and educational support. Many features and fees are subject to negotiation.
Promote Paperless Pay
Next, present the program to employees. Clearly communicating how paperless pay works and how it benefits workers builds support and motivates people to enroll.
Employers use meetings, posters, brochures and training videos to educate employees. If you have employees who do not speak English fluently, provide materials in languages they can easily understand.
Employers can implement electronic wage payment without fear of costly litigation or administrative enforcement action as long as they comply with applicable state laws. And the number of states that permit paperless wage payment will surely increase in coming years.
The author is an attorney with Margolis & Tisman LLP in San Francisco and chairs the American Payroll Association’s Government Affairs Task Force subcommittee on payroll cards.