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The pros and cons to pay cards

What Is a Pay Card?

Employers typically have multiple employee payment methods available to them. Some of the more common methods are direct deposit, or by check. Alternatively, some states allow employers to pay their workers by pay card.

What is a pay card?

A pay card (or payroll card) is a prepaid card that employers can use to pay employees. Each payday, the card is loaded with the employee’s wages for that pay period. Employees can use the pay card like a debit card, or they can withdraw wages through an ATM, bank cashier, or purchase where they receive cash back.

A 2012 study found that $34 billion was loaded on 4.6 million active pay cards, which is expected to grow to $68.9 billion loaded on 10.8 million cards by 2017.

What are the pros to pay cards?

Pay cards are beneficial to employees that are unbanked, meaning they do not have any bank accounts. In 2013, 7.7 percent of households were unbanked (about 9.6 million households), according to a 2013 Federal Deposit Insurance Corporation (FDIC) national survey of unbanked and underbanked households. Unbanked employees are unable to use direct deposit and they may incur large check-cashing fees for paper checks. Pay cards let unbanked employees receive their pay and immediately use it.

Employers can save money by using pay cards. Paycards are reloadable, so employers do not need to purchase new cards for every pay period, like they would have to do with paper check stock.

Pay cards can also be used like debit cards at most businesses since they are often distributed by common card companies, e.g., Visa, MasterCard.

What are the cons to pay cards?

Employees can be hit with many different fees from pay cards. These could include ATM fees, replacement fees, inactivity fees, and balance inquiry fees. With so many fees, employees could lose significant portions of their wages.

Also, ATMs do not disburse money to exact dollar and cent amounts, meaning workers may not be able to withdraw their whole pay.

More information about pay cards

There have been cases where employers required employees to receive their wages using pay cards, subjecting them to related fees. According to the Fair Labor Standards Act (FLSA), employees should have an option as to how they receive their pay. Employers cannot require employees to use pay cards. They must offer wages in a form of cash or in a way that can be easily converted into cash.

According to a Consumer Finance Protection Bureau bulletin, pay cards must meet the requirements laid out in Federal Reserve Regulation E, which implements the Electronic Fund Transfer Act (EFTA) of 1978. These requirements include:

  • Employees must know of any fees they could have from using a pay card.
  • The card issuer must make the card’s transaction history available for review by the employee.
  • The employee’s liability for unauthorized card use is limited.
  • Financial institutions must respond to a consumer’s report of errors as long as it is within a certain amount of time.

Many states also have laws that say workers should receive their pay in full and without reductions. The payroll card regulations have made this payment method controversial since employees cannot always receive their full pay from ATMs and because portions of their pay may be taken away in fees. Check with your state authorities to find out if you need to follow any state-specific pay card rules.

One famous case against pay cards took place in Pennsylvania. In 2013, an employee sued the owner of several McDonald’s restaurants. The employees were required to use pay cards, which subjected them to many fees. In June 2015, a judge ruled that paying employees with pay cards that incur fees when trying to withdraw cash is illegal in Pennsylvania.

When deciding if pay cards are right for your employees, remember to consider your state laws in addition to the pros and cons.

Do you need help running payroll for your business? Our payroll software makes it simple. We even provide free direct deposit and an option to print checks so you can offer multiple pay options to your employees.

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