You’ve probably been hearing about the advantages of payroll cards, those debit cards onto which you can pre-load employees’ wages each pay period.

Both the banks and industry groups like the American Payroll Association (APA) have been pushing payroll cards as a cheap, electronic way for employers to pay employees, especially those who can’t receive direct deposits because they lack bank accounts. These groups also argue that the cards help such employees steer clear of the high fees that check-cashing establishments usually charge.

These arguments are persuading increasing numbers of employers to go the payroll-card route. According to a 2011 survey by the Federal Deposit Insurance Co., about 4 million U.S. households have someone receiving their wages that way.

But the bright picture painted by the industry doesn’t tell the whole story.

The dark side
A high-profile employee lawsuit is casting light on the other side of the picture, which may not be pretty, especially for the low-paid employees who are the usual target audience for payroll cards.

An employee of a McDonald’s franchiser in northeastern Pennsylvania has sued the fast-food operator, claiming she was obliged to receive her pay through a payroll card, and then had to pay $1.50 every time she tried to access her money at ATMs.

The card allowed for free withdrawal at JPMorgan Chase ATMs, but the employee, Natalie Gunshannon, said there weren’t any branches of that bank near her home.

Now the McDonald’s franchiser has changed its position to allow employees to receive their pay by check, direct deposit, or payroll card. But Ms. Gunshannon is maintaining her lawsuit, claiming the employer should have been doing that all along.

Different state regs
According to the APA, Pennsylvania is one of 18 states where employers must ask employees’ permission before enrolling them in an electronic wage payment program like payroll cards or direct deposit.

In 25 states, all-electronic wage payment is allowed across the board, while in the other seven states either the situation isn’t clear-cut or only partial electronic payment is allowed.

Obviously this state of affairs creates a complicated tableau for employers, especially those that have multi-state operations.

And a muddled regulatory picture isn’t the only consideration with payroll cards. Employers who want to be fair to their employees may hesitate once they know about the fees their employees are sometimes charged to access their pay.

According to The New York Times, one card provider — the Times didn’t say which — charges $1.75 to make a withdrawal from most ATMs, $6 to replace a card and $7 inactivity fees for some cardholders who don’t use their cards.

The Times quoted a McDonald’s employee in Milwaukee, Devonte Yates, as saying he pays $40-$50 a month in fees associated with his JPMorgan Chase payroll card. Mr. Yates makes $7.25 per hour.

Minimum wage issues?
For low-paid employees, it’s even possible that once payroll card fees are taken into account, their wages may fall below minimum wage thresholds.

So with all these potential problems in mind, if you’re thinking about adopting the payroll-card method of paying employees, you may want to do the following:

    1) Make payroll cards voluntary. Even if your state allows you to impose such methods of payment, is it worth it in terms of fairness, equity and employee morale?

    2) Communicate real benefits. Before going ahead with a payroll-card program, take the time to calculate what the average bank-account-less employee forks over per pay period to cash payroll checks with check-cashing agencies. The Times quoted a Citibank spokesperson as estimating check-cashing fees at 3%. Let employees know that the program will save them these costs.

    3) Monitor card fees. The provider you’re considering may give you an overly rosy view of the fees employees will or won’t be charged. Look carefully at the schedule of fees beforehand, and take employee complaints about excessive fees seriously once you implement a payroll-card program. If employees are paying heavy fees on their cards, it undermines your claim to be saving them money compared with check cashing.

    4) Be leery of bank incentives. The Times reported that one New York public employer was promised a dollar for every employee it signed up to Citibank’s payroll-card program. Arguably, such incentives may skew your business decision, which should be based on whether such a program is right for you AND your employees.

    5) Focus on compliance. Payroll card programs must comply with federal and state laws regarding consumer protection, disclosure, access to wages, access to account information, fraud protection and so forth. Your provider should be able to explain how the program it’s proposing meets these requirements.

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