New York Attorney General Eric Schneiderman has launched an investigation into companies that pay hourly employees by depositing payroll onto prepaid cards. More than 20 large employers have received letters from Schneiderman requesting information on their payroll card systems.

The investigation comes on the heels of a New York Times article published June 30, 2013, that detailed the practice, which is common among retailers and restaurants. Payroll cards can provide substantial benefits to employers and employees alike. Many cards allow employees free access to their funds (or access for fees much lower than those charged by check cashers), and the cards are a convenient payment mechanism that many consumers prefer over cash. Accordingly, prepaid cards have experienced explosive growth in recent years.

Employer costs can be lower with cards than with paper checks. Nevertheless, payroll cards, like debit cards, typically have fees associated with inquiries, card replacement, ATM withdrawals, or inactivity. Mr. Schneiderman’s office stated that it was concerned that these types of payroll card fees may be insufficiently disclosed or excessive (monthly service fees but no other charges are currently restricted by New York law) and that the fees reduce employees’ take-home pay. 

In addition to the issues raised by Mr. Schneiderman, use of prepaid payroll cards can raise a host of other legal questions.

  • In some states, employers must provide a mechanism that will allow their employees to access 100 percent of their pay (after withholding) without incurring any charges.
  • Employees’ take-home pay may be less than minimum wage, potentially triggering wage and hour violations for their employers, after accounting for unavoidable card fees.
  • Many states regulate permissible means of paying employees, and some require employers to obtain employees’ written consent to use prepaid payroll cards.
  • States commonly also require employers to provide a means for employees to obtain printed payroll statements without cost.
  • Federal law prohibits mandatory use of the cards as a condition of employment. Employees interviewed for the New York Times article claimed that they were forced to use the cards.
  • Unionized employers should consider whether they are required to bargain with the union before implementing payroll cards. 

The investigation has raised concern not only for employers using payroll cards but also for the financial services industry, which has invested significant time and effort in developing payroll cards as a cost-effective alternative to traditional payroll services and deposit accounts. Mr. Schneiderman requested that the employers under investigation turn over contracts and correspondence between the employers and the payroll card providers.

When designing or updating payroll policies, employers should exercise caution when including prepaid payroll card programs. If this option is provided to employees, employers should contact counsel to ensure that their program complies with applicable state and federal laws. Payroll card issuers and distributors also need to be informed of legal issues facing their potential employer clients. 

Ballard Spahr’s Labor and Employment Group and Employee Benefits and Executive Compensation Group routinely assist employers with payroll matters. The firm’s Consumer Financial Services Group frequently assists issuers and distributors of prepaid cards, including payroll cards. If you have questions about the AG’s investigation or would like to discuss these issues further, please contact Patricia A. Smith at 856.873.5521 or smithpa@ballardspahr.com in the Labor and Employment Group, Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com or Mercedes Kelley Tunstall at 202.661.2221 or tunstallm@ballardspahr.com in the Consumer Financial Services Group, or the Ballard Spahr attorney with whom you work.  

 


 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have. 

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