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Consumer protection agency scolds employers on payroll cards

Following a spate of negative press reports and complaints from Congress about fees associated with payroll debit cards, federal regulators have issued a warning to employers that they cannot force workers to receive their pay on the cards.

The bulletin was issued this month by the Consumer Financial Protection Bureau, the consumer watchdog agency created in the wake of the nation’s recent financial crisis. The agency took the action as an increasing number of companies have been depositing employee wages onto payroll debit cards as a paperless alternative to checks.

Banks tout the cards as a way for employers to cut payroll costs and to give workers immediate access to their funds. The cards also offer employees the convenience of making purchases as they would with a regular debit card instead of carrying cash. And they allow people who don’t have bank accounts to avoid high fees charged by check-cashing stores.

But payroll cards typically have fees of their own. Terms vary, but costs can include monthly maintenance fees and fees for cash withdrawals, balance inquiries and lost cards.

Using the card to make purchases typically is free.

Payroll card usage is expected to grow, possibly fueled by the commissions that some employers receive from banks for each employee they sign up to a particular card.

In July, a group of U.S. senators wrote to the financial protection bureau urging it to investigate fees and practices associated with payroll cards. The senators expressed particular concern that some employers may be “coercing” employees into accepting the cards by giving them no other option for receiving their pay.

“Every employee should have the right not to use such a card and instead receive their pay via a paper check or direct deposit,” the senators wrote.

In its bulletin, the financial protection bureau said it was reiterating a 2006 ruling that specifically included payroll card accounts under Regulation E of the Electronic Fund Transfer Act. The rule prohibits mandating that employees receive direct deposit into an account at a particular institution chosen by the employer.

“Thus, an employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution,” the bulletin said. “An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means,” such as direct deposit to an account of the employee’s choosing, paper check or cash.

The agency also noted that it has the authority to enforce electronic fund transfer rules and that it intends to stop violations “before they grow into systemic problems.”