Regulating Payroll Cards
By Heather Morton | Vol . 23, No. 25 | July 2015
Did you know?
- Employers loaded $30.6 billion onto more than 5 million payroll cards in 2013.
- Twenty-one states and Puerto Rico have laws regulating payroll cards.
- Twelve states are considering payroll card legislation in 2015.
Payroll cards have emerged as an alternative to paper checks and direct deposits for paying wages, and lawmakers are acting to allow their use, while at the same time protecting employees from hidden fees and lack of transparency. Payroll cards operate much like prepaid debit cards. An employer can load an employee’s wages directly onto a card that is issued and often branded with American Express, Discover, MasterCard or Visa. Payroll cards can be used to make purchases in stores or online, pay bills and access cash through ATM withdrawals, bank tellers or through convenience checks.
Proponents argue that, compared to cash or paper checks, payroll cards are a safe and convenient way to receive wages. They have the same protections as traditional debit cards under the Federal Reserve Board’s Regulation E. For employees who don’t use financial institutions or use check-cashing services for their paychecks, payroll cards eliminate check-cashing fees. Further, payroll cards may offer budgeting or savings tools because employees can use monthly transaction records to track their spending. In addition, if the card is lost or stolen, the transactions can be disputed and the funds can be replaced, if necessary.
Consumer advocates like the ease and safety of payroll cards, but express concern not only about the fees for card-related activities, but also about whether employees receive clear and appropriate disclosure of the terms, conditions and options available. Although payroll cards eliminate check-cashing fees, some card providers may charge fees for ATM transactions, point-of-sale and customer service, overdrafts and access to account balances. Questions have been raised about whether payroll card programs and employers provide clear and adequate notice of such fees and how to avoid them, and also whether employees have a choice between receiving a paper check, direct deposit or a payroll card.
Payroll cards are regulated under the federal Electronic Fund Transfer Act (EFTA) and Regulation E, which implements the EFTA. Regulation E requires the initial disclosure of any fees imposed by a financial institution, details regarding limitations on liability and the types of electronic funds transfers that can be made with the card. The disclosures must be clear, readily understandable and in written form. Payroll card issuers must provide periodic statements or make a history of account transactions available electronically or upon request. The EFTA and Regulation E pre-empt state laws relating to electronic fund transfers, but only to the extent of any inconsistencies between the state and federal laws. State laws that provide greater protection than the EFTA and Regulation E, however, are not considered to be inconsistent.
Twenty-one states and Puerto Rico have enacted legislation authorizing the use of payroll cards. Legislation in 19 states—Arizona, Florida, Georgia, Hawaii, Illinois, Kansas, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Dakota, Oklahoma, Oregon, Tennessee, Vermont, Virginia and West Virginia—and Puerto Rico apply to any employers, while Texas and Washington enacted legislation specific to institutions of higher learning.
Several of the laws have put in place additional protection for employees who receive payroll cards. Hawaii law requires three free withdrawals per pay period using the payroll card and free 24/7 access to the card balance. Illinois allows one free withdrawal per pay period but not less than twice per month, one free transaction history each month and two free declined transactions per month. Michigan law requires one free withdrawal or transfer per pay period, but not more than once per week, 21-day notice of any changes in the fees or terms of service, and unlimited free balance inquiries. Vermont requires three free withdrawals per pay period and a 21-day written notice of changes in the fees or terms. Payroll cards must also be set up with a PIN number or signature like other debit cards and to prevent any withdrawal in excess of the card’s balance. New Hampshire’s law requires one free withdrawal per pay period at a place convenient to the employment location. As part of its disclosure requirement, Puerto Rico requires that employers make information available to the employee regarding electronic fraud. The employer must specify the degree of responsibility of the employees, the employer and the bank used by the employer for the electronic payroll payments in the case of electronic fraud.
Payroll card-related legislation has been introduced or is pending in 12 states in 2015 legislative sessions. Florida enacted legislation regulating the use of payroll cards by labor pools. Under the new law, labor pool employers that intend to use a payroll card program must give notice prior to the first pay period. The labor pool also must give workers a list of businesses near the labor pool’s location where free withdrawals can be made. Georgia enacted legislation authorizing payroll cards. Kansas amended its definition of a payroll card, deleting the requirement that a payroll card must be a machine-readable instrument.