A New York regulation establishing conditions for the payment of wages by direct deposit or debit card scheduled to take effect on March 7, 2017, has been invalidated and revoked by the state's Industrial Board of Appeals (Board).

The regulation, which was adopted in September 2016 by the New York State Department of Labor (NYSDOL), implemented provisions of the state's labor law that require prompt and full payment of wages and prohibit employers from directly depositing the net wages or salary of certain employees in a bank or other financial institution without the employee's advance written consent. The NYSDOL had interpreted those provisions to permit payment by payroll debit cards with an employee's consent provided the employee had an effective means to make an unlimited number of withdrawals without incurring fees either through a bank teller or by using an ATM.

The NYSDOL regulation established a new notice requirement for employers paying employees by direct deposit or debit card, new requirements for obtaining written consent, and new recordkeeping requirements. In addition, for employers paying by debit card:

  • Employees must be provided with access to an ATM that is located within a reasonable travel distance from the worksite or the employee's home and allows employees to make no-cost withdrawals.

  • Employees must be provided with at least one no-cost method for an employee to withdraw up to the total amount of wages for each pay period or the balance remaining on the debit card.

  • Various fees cannot be passed on, directly or indirectly, to employees, including application, initiation, loading, or participation fees; account inactivity fees; maintenance fees; charges for using telephonic or online customer service; charges for accessing balance amounts or other account information online; fees for providing statements, transaction histories, or card issuer policies; account closing fees; fees to issue checks for the card balance; and declined transaction fees at an ATM that does not provide free balance inquiries.

A petition challenging the NYSDOL regulation was filed with the Board in October 2016 by a California-based payroll debit card vendor that provides custom payroll debit card programs to New York employers. In its decision invalidating the regulation, the Board commented that the regulation "by prohibiting all fees associated with use of a payroll debit card, depart[s] significantly from the plain language of the statute and [the NYSDOL's] prior position on the subject." The Board concluded that the regulation exceeded the NYSDOL's authority, noting that the New York Department of Financial Services regulates banks and financial institutions in the state and the fees they can charge for banking services "including fees related to checking accounts to which employees may legally direct deposit wages…and licensed check cashers where employees may choose to cash their paychecks."

In the Board's view, because the fees associated with use of payroll debit card were similar to fees associated with checking accounts and licensed check cashers, they were not subject to regulation by the NYSDOL. The Board stated that because employers were already allowed by statute to pay wages by debit card with an employee's consent, the regulation was "invalid to the extent [it] prohibit[s] otherwise lawful conduct by financial institutions for providing banking services." In the Board's view, the regulation impermissibly prohibited "financial institutions such as petitioner from charging fees for banking services to employees using payroll debit cards." The NYSDOL can appeal the Board's decision to the New York Supreme Court.

Although the Board's order revokes the entire regulation, it does not appear to challenge the validity of prior NYSDOL opinions interpreting the statutory limits on wage payments. In addition, the Board commented that despite having invalidated the regulation, it recognized that the NYSDOL had "a well-founded concern that low-wage workers without access to traditional bank accounts" might be coerced by employers to accept payroll debit cards and "be subject to excessive or hidden fees when accessing their wages." Thus, employers currently using debit cards to pay their employees should consider having legal counsel review their payroll debit card practices and policies, including any fees associated with such cards.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The firm's Labor and Employment Group routinely assists employers in ensuring compliance with state, federal, and local statutes, including those dealing with payroll matters.

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