National Association of Attorneys General
Payroll Cards and the States: Benefits, Challenges, and Action
Since the turn of the millennium, the press, government publications, and economic scholars have documented the plight of the “unbanked” and “underbanked” share of the American population dwelling in the nation’s financial shadows. Left without a reliable, costless way to cash and save their wages, low-earning workers often turn to expensive check cashing establishments which charge hefty fees for basic financial services. As employers look for a way to achieve payroll cost savings and as financial institutions across the country seek to bring the 88 million Americans who are financially underserved back into the mainstream, payroll cards have surged in popularity as an alternative to traditional paychecks and direct deposit. Aite Group, a business research and advisory firm, has reported that $34.1 billion of wages were loaded onto payroll cards in 2012 and projects that number to increase by 67 percent to $56.9 billion by 2015. However, despite the numerous advantages payroll cards carry for employers, workers, and financial institutions, the rise of this payment method has also presented a new array of challenges for the states.
Payroll cards function very similarly to debit cards. Instead of issuing checks or directly depositing wages into an employee’s bank account, the employer deposits wages into a payroll card account. Employees can then use these payroll cards to withdraw their wages from an ATM, make point-of-sale purchases, and receive cash back at stores, much like consumers do with regular debit cards. Payroll card accounts are generally provided by banks or FDIC-insured non-bank vendors, while the cards have -- since 2001 -- typically carried Visa or MasterCard branding.
The New York State Attorney General’s Office recently reported that 5.8 million American workers received payment by payroll cards in 2013. The expanded use of payroll cards as a wage payment method is proof of the advantages they hold for employers, employees and banks alike. For employers, paying workers via payroll cards reduces the costs associated with printing paychecks, replacing lost or stolen paychecks, and bank-charged check processing fees. Visa reports that each payroll card wage payment saves an employer $1.65 relative to the cost of paying wages by paper paycheck. The payroll cost reductions realized through payroll card use are especially profitable for larger employers. Furthermore, answering an inquiry for a 2005 report, bankers in financial institutions offering employers payroll card services told the Office of the Comptroller of the Currency that their banks mainly provide payroll cards to help their clients (i.e., employers) cut costs resulting from check processing, thus improving the cash management services banks can provide their commercial clients.
By receiving wages via payroll card, employees who do not have traditional bank accounts have the ability to manage their money with a multifunctional product. Payroll cards reduce the need for low-wage employees to frequent check cashing establishments where they not only must pay substantial fees, but must also receive their pay in cash at one time. In contrast, a payroll card allows a worker to withdraw cash as needed and make point-of-sale transactions in stores, like a more traditional debit card tied to a checking account. Having a debit card-like product also allows the current unbanked working population to make purchases online, manage money and spending more effectively, and transfer money to other people. In the absence of payroll cards, these services are out of reach for many low-wage workers without access to a checking account and a regular debit card.
Despite the potential benefits payroll cards carry, they also pose a number of major problems for workers resulting in criticism from consumer advocates and government representatives. Although payroll cards have been marketed as an alternative to costly check cashing services among the unbanked or underbanked, many payroll card programs charge employees a substantial array of fees for essential services. A requirement that employees pay a fee for services such as monthly maintenance, point-of-sale transactions, ATM withdrawals, balance inquiries, account history statement requests, account inactivity, customer service, overdraft, getting cash back at retailers, transferring funds from the payroll card account to another bank account, declined transactions, account closure, and card replacement can quickly accumulate.
Lower-wage workers are disproportionately affected by these fees because they constitute a large percentage of net wages. The New York Times reported that employees across the nation have faced charges such as $7 for inactivity, $25 for overdraft, $2.25 for out-of-network ATM withdrawals, and $5 for additional copies of statements. These fees can quickly erode the wages of employees that take home low wages, sometimes bringing down their net pay below the minimum wage. This trend particularly disadvantages those with inadequate financial literacy, English proficiency, and/or Internet access, for whom monitoring a payroll account and understanding its terms may prove to be confusing and difficult. Although payroll cards have the potential to serve as a fairer alternative to check cashing establishments, they also have the potential to be just as costly. This is particularly troubling to consumer advocates and legislators given that payroll cards are especially prevalent among large employers of low-wage hourly workers who would gain the most from having a bank product available to them that minimizes burdensome fees as opposed to remaining unbanked.
Furthermore, in many instances employer-offered payroll card programs have placed restrictive limitations on employees. For example, some employers have required that employees be paid via payroll card, despite their preference for another method of wage payment. Overly limited ATM networks which employees can use to withdraw some or all of their wages can also make accessing pay onerous, often requiring employees to travel considerable distances from their homes or wait until stores open to make an in-network ATM withdrawal. Additionally, some employers do not provide free, adequate customer service or ways for employees to check their account balances, leaving those who can least afford it even more prone to incurring fees for overdrawing their accounts.
Federal regulations are very clear about the acceptable use of payroll cards to pay wages. In 2006, the Federal Reserve Board approved a rule that ensures that Regulation E, which implements 1978’s Electronic Fund Transfer Act (EFTA), covers payroll card accounts. Regulation E entitles employees receiving wages via payroll card to clear and understandable initial disclosures of fees for “electronic fund transfers,” which include point-of-sale transactions, ATM transfers, direct deposit of funds, and withdrawal of funds. It also mandates that the issuer of a payroll card provide periodic account statements to account holders. The Consumer Financial Protection Bureau (CFPB) also stated in a 2013 bulletin that employers cannot require employees to receive their wages by a payroll card service the employer chose.
While the CFPB recognizes the role of state wage laws in affording workers further protections from unfair payroll card programs, Regulation E and the EFTA preempt state laws surrounding “electronic fund transfers” if they are inconsistent with Regulation E and the EFTA. State laws are inconsistent in this context if they do not give workers greater payroll card protections than those contained in Regulation E and the EFTA.
State Laws and Regulation
The most stringent regulation of the payroll card industry has taken place at the state level. A substantial body of state legislation and administrative rules from across the country --often championed by a state’s attorney general -- has established minimum standards for payroll card usage by employers and sought to eradicate unfair fee structures and other restrictive account conditions. Existing state action might guide future steps for states lacking legislation regarding payroll cards, clear rules for this payment method, or strong enough regulations to prevent unfair wage payment practices.
The following provisions of a number of state laws and regulations serve as examples of the policy tools at legislatures’ and agencies’ disposal to impose fairer standards of payroll card use:
Employee Choice: One common feature among state laws and regulations controlling payroll cards is the requirement that workers have the ability to elect to use a legally-authorized payment method other than payroll card. Similar provisions include prohibiting employers from making payroll card use a mandatory condition of employment and allowing employees using payroll cards to submit a request to receive wages through another payment method, which the employer must honor within a required period of time depending on the state.
Disclosure and Consent: State payroll card laws have generally required that employers disclose to workers all terms and conditions of a payroll card program and receive consent from workers prior to enrolling them. Full disclosure includes providing the complete fee schedule the payroll card vendor will impose for card and account use. States have also included guidelines for this written disclosure, such as making it readily understandable and in a language that any given employee can read. Written consent must be obtained free from coercion or intimidation and may not be a condition of employment. Various state laws also require that employers alert employees a certain number of days prior to changing a payroll card program’s terms and fee schedule.
Free Access to Wages: Some of the most forceful provisions of states’ payroll card laws are those that combat the costly fees workers accumulate just to access the wages they are owed. A number of states entitle employees to access the total amount of their wages and/or make a minimum number of withdrawals over a given time or pay period without incurring a fee.
General Fees: Numerous states also prohibit a variety of general fees associated with payroll cards from being passed down to participating employees. These include fees for opening a payroll card account, participation in a payroll card program, monthly maintenance, and having wages loaded onto a payroll card. Some states also prevent employers from passing down the costs of operating a payroll card program to employees.
Required Services: States laws and regulations have required that employers provide various combinations of the following services to employees using payroll cards:
- Free point-of-sale transactions.
- Free declined transactions.
- A method by which they can dispute fees.
- One free replacement payroll card per year.
- Free online access to account information.
- Free telephone services to check account information.
- Free hard copy transaction histories every month.
Overdraft: A number of states’ laws prevent charging cardholders overdraft fees or prohibit tying payroll card fees to the balance of an employee’s account.
Account Inactivity and Expiration: States have dealt with the issue of what exactly happens to payroll card accounts when they are inactive or employees leave a company. Steps they have taken include prohibiting fees for inactivity, requiring a free withdrawal of remaining wages prior to closing an account, and requiring the employers and/or the financial institution offering the payroll card, to provide the terms and conditions of maintaining a payroll account post-employment to ex-employees.
Cardholder Privacy: One state, Minnesota, has passed a provision affording payroll cardholders a level of privacy in their card use, mandating that personal information about employees generated through payroll card use only be used for the purposes of administering payroll card accounts and processing card transactions.
A Delicate Balance
State-level action to contain the disadvantages of payroll cards has not been without its opposition, however. State chambers of commerce have vocally opposed legislative measures to regulate payroll cards as an increase in the cost of doing business. A New York Times letter to the editor from the president and chief executive of the Business Council of New York State described a recent legislative proposal by New York Attorney General Eric Schneiderman as a “costly restriction” that unduly punishes payroll cards as a wage payment method, likening the proposed rules to eliminating payroll cards from use in New York altogether. California Governor Jerry Brown, a former attorney general, vetoed a California bill that would have imposed particularly stringent requirements on what services and account policies cardholding workers are entitled to, viewing them as mandates that would force financial institutions and employers to stop offering payroll cards. Brown feared a law so strict would “injur[e] the very workers this bill aims to protect.” As lawmakers at the state level consider legislative solutions or, alternatively, further administrative action, they thus face a regulatory trade-off between imposing strict standards for payroll card use and maintaining a legal environment that provides sufficient incentive for employers and card vendors to offer payroll cards for employees who can reap financial benefits from them.
Litigation surrounding the heavy fees associated with wage payment through payroll card has made national headlines over the last two years as well. Natalie Gunshannon of northeastern Pennsylvania brought a class action lawsuit in 2013 against the owners of multiple McDonald’s franchises in the region, alleging that the owners of the restaurants required payment to be received via a JPMorgan Chase payroll card. According to Gunshannon and the other plaintiffs, fees for withdrawal, online payment, and account inactivity spells caused net take-home wages for workers to fall below the minimum wage. The owners of the franchises have since expanded payroll options for their employees to include traditional paper paycheck and direct deposit, while the case is still pending in Pennsylvania.
An additional opportunity for ensuring that payroll cardholders benefit from the advantages the cards offer without suffering from unfair employer- or vendor-imposed terms and conditions is regulation originating from within the private sector. A prime example is MasterCard’s December 2013 payroll card standards. By October 2014, all employers and payroll card providers offering MasterCard payroll cards must follow a list of standards that in many ways mirror those contained in the provisions of state laws and regulations.
While payroll cards have proven to be an advantageous method for employees that often do not have access to mainstream financial services, such as bank accounts and debit cards, to access and manage their incoming wages, there is ample opportunity for the states to manage potential issues as they arise. Recent bills introduced in the New York State Legislature with the support of Attorney General Schneiderman that would impose tough restrictions on employers in their provision of payroll cards demonstrate that, in the presence of continuing challenges, states are equipped to fill a regulatory void by imposing stricter rules than those afforded under federal regulations.
 Gosia Glinska, Fighting Financial Exclusion: How to Serve 88 Million Americans Who Have No Bank, Forbes, (June 5, 2014), http://www.forbes.com/sites/darden/2014/06/05/fighting-financial-exclusion-how-to-serve-88-million-americans-who-have-no-bank/ (last visited Aug. 1, 2014).
 Madeline K. Aufseeser, The Contenders: Prepaid Debit and Payroll Cards Reach Ubiquity, Aite, (Nov. 14, 2012), http://www.aitegroup.com/report/contenders-prepaid-debit-and-payroll-cards-reach-ubiquity (last visited Aug. 1, 2014).
 Office of the Comptroller of the Currency, Payroll Cards: An Innovative Product for Reaching the Unbanked and Underbanked (June 2005), http://www.occ.gov/topics/community-affairs/publications/insights/insights-payroll-cards.pdf (last visited Aug. 1, 2014).
 New York Attorney General’s Office, Pinched by Plastic: The Impact of Payroll Cards on Low-Wage Workers (June 12, 2014), http://ag/ny/gov/pdfs/Pinched%20by%20Plastic.pdf (last visited Aug. 1, 2014.)
 Visa Payroll Card, Visa, http://usa.visa.com/download/business/visa-payroll-profile.pdf (last visited August 1, 2014).
 Office of the Comptroller of the Currency, supra, n. 3.
 Office of Senator Richard Blumenthal, Blumenthal Urges CFPB, DOL to Protect Workers Paid with Predatory Payroll Cards (July 11, 2013), http://www.blumenthal.senate.gov/newsroom/press/release/blumenthal-urges-cfpb-dol-to-protect-workers-paid-with-predatory-payroll-cards (last visited Aug. 1, 2014).
 Jessica Silver-Greenberg and Stephanie Clifford, Paid via Card, Workers Feel Sting of Fees, N.Y. Times (June 30, 2013), http://www.nytimes.com/2013/07/01/business/as-pay-cards-replace-paychecks-bank-fees-hurt-workers.html?pagewanted=all&_r=0 (last visited Aug. 1, 2014).
 New York State Office of the Attorney General, supra, n. 4.
 Halah Touryalai, Are Hourly Workers Being Short Changed? The Truth About Payroll Cards, Forbes (July 23, 2013), http://www.forbes.com/sites/halahtouryalai/2013/07/23/are-hourly-workers-being-short-changed-the-truth-about-payroll-cards/ (last visited Aug. 1, 2014).
 New York State Office of the Attorney General, supra, n. 4.
 Rachel Abrams, New York Attorney General Supports a Bill Regulating Payroll Cards, N.Y. Times (June 12, 2014), http://dealbook.nytimes.com/2014/06/12/eric-schneiderman-favors-state-curbs-on-payroll-cards/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1 (last visited Aug. 1, 2014).
 New York State Office of the Attorney General, supra, n. 4.
 The Scope of Regulation E Now Covers Payroll Cards, Federal Reserve Bank of Philadelphia (2007), http://www.philadelphiafed.org/bank-resources/publications/compliance-corner/2007/third-quarter/q3cc2_07.cfm (last visited Aug. 1, 2014).
 Federal Reserve System, 12 CFR ¿ 205 (2007).
 CFPB Bulletin 2013-10, Consumer Financial Protection Bureau (Sept. 12, 2013), http://files.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf (last visited Aug. 1, 2014).
 The following states’ laws and regulations will be discussed:
¯ Hawaii (2014): HB 1814, http://www.capitol.hawaii.gov/session2014/bills/HB1814_SD2_.HTM
¯ Massachusetts: Part 1, Title XXII, Chapter 167B, Section 7 of the Massachusetts General Laws, https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter167b/Section7
¯ Minnesota (2005): SF 2093, https://www.revisor.mn.gov/bills/text.php?number=SF2093&version=2&session=ls84&session_year=2005&session_number=0
¯ Nebraska (2014): LB 765, http://nebraskalegislature.gov/FloorDocs/Current/PDF/Slip/LB765.pdf
¯ New Jersey: Section 12:55-2.4 of the NJ State Labor Laws and Regulations, http://lwd.dol.state.nj.us/labor/wagehour/lawregs/selected_nj_state_labor_law.html#5524
¯ North Carolina (2005): Administrative position by state Department of Labor, http://www.nclabor.com/wh/fact%20sheets/debit_payroll.htm
¯ Oregon (2007): HB 2256, https://olis.leg.state.or.us/liz/2007R1/Downloads/MeasureDocument/HB2256/Enrolled
¯ Vermont (2010): Act 115, http://www.leg.state.vt.us/docs/2010/acts/act115.pdf
 Colorado, Hawaii, Illinois, Oregon.
 Colorado, Hawaii, Illinois, Massachusetts, Minnesota, Nebraska, New Jersey, Oregon, and Vermont.
 Hawaii, Illinois, Minnesota, New Jersey, North Carolina, Oregon, Vermont.
 Hawaii, Minnesota, Oregon, Vermont.
 Hawaii, Minnesota, New Jersey, Vermont.
 Hawaii, Vermont.
 Colorado, Hawaii, Illinois, Minnesota, Nebraska, New Jersey, North Carolina, Oregon, Vermont.
 Hawaii, Illinois, Minnesota, Nebraska, Vermont.
 Hawaii, Vermont.
 Hawaii, Vermont.
 Illinois, Minnesota, Vermont.
 Hawaii, Illinois.
 Hawaii, Illinois, Minnesota, Vermont.
 Heather Briccetti, Benefits of Payroll Cards, N.Y. Times (June 17, 2014), http://www.nytimes.com/2014/06/18/opinion/benefits-of-payroll-cards.html?_r=0 (last visited Aug. 1, 2014).
 California SB 931 Veto Message, Office of the Governor (Oct. 9, 2011), http://gov.ca.gov/docs/SB_931_Veto_Message.pdf (last visited Aug. 1, 2014).
 Susanna Kim, McDonald’s Pa. Franchisee Backs Down on Debit-Card Only Payroll, ABC News (July 2, 2013), http://abcnews.go.com/Business/mcdonalds-pa-franchise-give-options-paying-wages/story?id=19558068&singlePage=true (last visited Aug. 1, 2014).
 Guidance for Card Issuers & Employers to Support Employees Developed in Consultation with Community New Organizations, MasterCard (Dec. 13, 2013), http://newsroom.mastercard.com/press-releases/mastercard-introduces-payroll-card-standards/ (last visited Aug. 1, 2014).
 New York State Office of the Attorney General, A.G. Schneiderman, Assembly Member Morelle, And Senator Gallivan Propose Payroll Card Act To Create Clear Rules And Protect Workers From Unfair Fees And Coercion, (June 13, 2014), http://ag.ny.gov/press-release/ag-schneiderman-assembly-member-morelle-and-senator-gallivan-propose-payroll-card-act (last visited Aug. 1, 2014).This is the second of four rule of law articles to appear in NAAGazette. They are the work of attorneys who participated in the June 2014 National Attorneys General Training and Research Institute (NAGTRI) International Fellows Program.