Payroll Debit Cards Can Be Illegal
The federal government is warning employers that force workers to accept pre-paid payroll debit cards that the practice violates the law.
Popular with Employers
The Consumer Financial Protection Bureau (CFPB) published a bulletin in September reminding employers that they can’t force employees to accept payment only by payroll cards.
Payroll cards are pre-paid debit cards that more employers are starting to use in place of paper checks or automatic deposit. They are touted as a good thing for employees who don’t have bank accounts, and they reportedly save employers from payroll fees.
But the cards are also loaded with fees charged to workers when they try to withdraw cash or check their balances. Complaints had been coming in to the CFPB that employers that use the cards — primarily in the food service and retail industries — are not giving workers a choice.
And that choice is apparently the key to their legality. Federal laws, including the Electronic Fund Transfer Act (EFTA) and the regulation implementing it, prohibit employers from mandating that employees receive wages exclusively on a payroll card, according o the CFPB.
Options & Protections
“Employees must have options when it comes to how they receive their wages,” said CFPB Director Richard Cordray in a statement. “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.”
Those protections include:
- Disclosure of fees consumers have to pay if they use the cards
- Access to their account histories, including their balances and any fees incurred
- Limits on consumers’ liability for unauthorized use, as long as they report it
- Error resolution rights, including a response from the financial institution notified by the consumer
What will happen to businesses caught violating the EFTA and Regulation E is unclear. The CFPB says only that “[i]n exercising our enforcement authority, our goals are to be proactive about identifying violations, stopping violations before they grow into systemic problems, maximizing remediation to consumers, and deterring future violations.”
And while many have been skeptical of the agency’s power, it may be coming into its own, according to one firm that represents employers. “The CFPB is no longer an agency working through its formative stage,” warns a Gibson Dunn article from June about the agency.
“[I]t has quickly become one of the most active oversight and enforcement agencies in the Federal government,” says the firm. “The Bureau has established many of its procedural rules and is pursuing its supervisory and enforcement mandates, and it is widely anticipated that the CFPB will launch numerous and broad-reaching investigations this year and in years to come.”
Trend in the Making
It will have its hands full, at least with payroll debit cards, as they aren’t going away anytime soon.
“Companies are using pre-paid debit cards as a cost-saving measure to process payroll, particularly for low-paid workers in retail and hospitality industries who may not have checking accounts in which direct deposits can be made,” observes Eric Gibbs, a lawyer with Girard Gibbs in San Francisco who practices consumer law.
Gibbs says that the hefty fees for routine use of the cards can “depress employees’ wages below the minimum wage, and, even if not, . . . put[ ] less money in their pockets to pay their bills.”
“This practice can perhaps be viewed as part of a growing trend in which companies attempt to bolster profits to the harm of the lowest paid workers,” Gibbs explains, “and these practices often run afoul of various laws and regulations.”
“I think we’ll continue to see these paycheck debit cards grow in popularity although I expect some states may pass legislation regulating their use and explicitly requiring the employees’ informed consent in writing,” predicts Gibbs.