Employers are always looking for innovative ways to streamline their businesses and cut costs. One area many employers want to target? The cost of providing paper payroll checks to employees. The savings associated with eliminating paper checks are potentially significant. According to a recent survey, a business with 100 employees who are paid bi-weekly could save as much as $4,200 each year. A business with 500 such employees could save more than $21,000 each year.

Many employees now receive their wages through voluntary direct deposit programs. Employees without bank accounts cannot participate in direct deposit programs, of course. Enter payroll card accounts. They sound good: employees are given reusable cards to purchase items and pay for services. But employers should be aware of a number of legal issues associated with using payroll card accounts in lieu of traditional paychecks.

What are Payroll Card Accounts?

The concept of a payroll card account is relatively simple. Rather than paying employees with cash or a check, the employer issues a “debit” card. The employees use the card to either withdraw all of the money on the card and effectively “cash” their paycheck, or use the card for individual purchases. Employers like payroll cards because they save the cost of printing and (potentially) mailing paper checks. But payroll card programs must comply with California and federal law. And, as usual, that’s not as easy as it may sound.

Basic Requirements

The California Labor Code contains specific requirements as to how, when, and by what methods an employee must be paid. The Labor Code does not specifically address payroll card accounts, but it does provide some fundamental guidelines. The Division of Labor Standards Enforcement (DLSE), the agency responsible for enforcing California’s wage-hour laws, relied on a number of labor code provisions to provide a framework for employers who use payroll card programs.

Labor Code section 221 requires an employer to provide employees immediate and free access to their wages. Many payroll card programs satisfy this requirement by allowing an employee to have at least one transaction per pay period without any charge. Section 212 also requires that wages be payable at an “established place of business within the state.” This requirement is satisfied if the payroll card provider is a federally insured national bank.

Federal law also imposes requirements on payroll card issuers. They must provide card holders an initial disclosure of fee schedules, periodic statements (or access to the account balance), guarantee limited liability for unauthorized transfers, and resolve any card or account errors within 60 days. 12 C.F.R. § 1005 et seq.

Must Participation be Voluntary?

Both the DLSE and Consumer Federal Financial Protection Bureau (CFPB) take the position that participation in payroll card programs must be voluntary. That position is consistent with the requirement under Labor Code section 213 that participation in direct deposit programs must be voluntary. (Of course, because employees do not need a bank account to participate in payroll card programs, the comparison with direct deposit is somewhat dubious.)

Also, under the applicable federal regulations, an employee cannot be required to “establish an account for receipt of electronic fund transfers with a particular institution.” 12 C.F.R. § 1005.10(e)(2). This regulation is aimed at “direct deposits.” Recently, the CFPB determined that payroll card accounts require an employee to “establish an account with a particular institution,” and therefore participation must be voluntary. The CFPB, however, did not articulate exactly how an employee is required to “establish an account” to obtain a payroll card.

Not surprisingly, a number of large employers have faced class action lawsuits in the last several years related to their use of payroll card programs.

Tips for Employers

Payroll card programs are attractive to employers for obvious reasons. Employers who seek to use these programs should ensure they comply with all of the other requirements related to employee wages, such a providing appropriate itemized wage statements. Also, until the legislature and/or the courts provide more guidance, the safest course of action is not to require mandatory participation in payroll card programs.