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In the age of technology and convenience, some businesses, particularly those with multi-state operations, are turning away from issuing employees paper paychecks or paying them by direct deposit. Instead, they are opting to pay employees using payroll debit cards. Some employers are issuing these cards, which are just like the debit card most people already carry in their wallet, to employees and depositing their wages on the card each pay period. Employees can use them to make purchases, withdraw money from an ATM and, in some cases, even pay bills.
Most of us already are accustomed to using the plastic cards in our wallet, so it sounds like a good idea, right? Not so fast, say some employees, the federal Consumer Financial Protection Bureau and an increasing number of states.

Recently, a McDonald’s franchise in Pennsylvania and its owners were sued by a former employee. The employee asserted that she was forced to receive her pay via a payroll debit card, which included several fees associated with its use. For example, fees included a $1.50 minimum charge for an ATM withdrawal, $5 for an over-the-counter cash withdrawal, $1 to check the card’s balance, $0.75 per online bill payment, and $15 to replace a lost or stolen card. These mandatory fees allegedly cut into the employee’s earnings and potentially dropped her below the minimum wage.

As most employers are well aware, under the Fair Labor Standards Act, covered, non-exempt hourly employees must receive at least minimum wage for all hours worked, and deductions that cut into or drop an employee below minimum wage are generally impermissible. Until very recently, however, the federal government had not weighed in concerning employer use of payroll debit cards, but many states had.

In July, more than a dozen U.S. Senators sent letters to the federal Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Labor asking the federal agencies to clarify whether current laws permit this practice by some large employers. The senators expressed concern that some companies may receive commission payments for signing employees up for these cards and that low-income workers are vulnerable and could be taken advantage of by these financial products.

On September 12, the CFPB published Bulletin 2013-10, which addresses the impact of the Electronic Fund Transfer Act (EFTA) on payroll card accounts. The bulletin states that the EFTA-implementing Regulation E prohibits employers from requiring employees to receive wages by electronic transfer to a payroll card account at a specific financial institution.

The CFPB derives its rationale from a provision in the regulation that states a consumer may not be required to “establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment...” The CFPB directs that in accordance with this regulation, employers are prohibited from requiring employees to “receive direct deposit” at a particular financial institution designated by the company. From this language, the agency derives its conclusion that “an employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means.”

The bulletin offers no discussion of how or why an employee paid by payroll card is necessarily required to “establish [any] account” anywhere for that purpose. Neither does the CFPB appear to take into consideration the significant ways in which payroll card arrangements differ from direct deposit, including some that make pay cards more readily usable than a check. What is clear, however, is that the CFPB construes Regulation E to mean that an employer is permitted to pay wages via a payroll card issued by a financial institution of the employer's choosing only if employees have the option to receive their wages in another form instead, such as by paper check or in cash.

In a statement released by CFPB Director Richard Cordray regarding the bulletin, he cautioned that “Employees must have options when it comes to how they receive their wages. Today’s release warns employers that they cannot mandate that their employees receive wages on a payroll card. And for those employees who choose to receive wages on a payroll card, they are entitled to certain federal protections.”

This characterization does not appear to be entirely accurate. Both the relevant section in Regulation E and the bulletin seemingly take the position that the EFTA does permit an employer to mandate wage payment by payroll card alone if the employee is allowed to choose the financial institution at which the wages will be deposited. The issue is requiring an employee to receive the funds at a specific institution, not the mandate of an electronic transfer of the funds themselves.

While the majority of states do not have actual laws governing payroll debit cards, the departments of labor for most states have weighed in with guidance for paying employees in this manner. The general consensus is that an employee must voluntarily consent to the card, i.e. it cannot be the only option for payment of wages. The other commonality amongst the states is that employees who use the card must be allowed to withdraw the entire amount of their pay at least one time per pay period without a fee or cost associated with the withdrawal. Some states do have stricter laws requiring written agreements between employees and employers for use of the card. Therefore, it is important that employers know the requirements for every state where they may offer payroll debit cards. Employers should bear in mind that the CFPB Bulletin states that the EFTA preempts state law, unless the state provides greater employee protections than the federal legislation.

Where does this leave businesses in light of these recent developments? Employers who are currently using or considering payroll debit cards should consult with their employment counsel to ensure the practice complies with applicable state laws and federal guidelines. Certainly, what appears to be the safer approach is to offer payroll debit cards as an option, but not the only method of payment, and to eliminate or greatly limit fees to the employee for using the card. Employers should also continue to monitor for further legislation or regulations that may come from the federal level.

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