What Is a Payroll Card, and Should You Offer It to Your Employees?

As employers continue to seek alternative payment methods, the use of payroll cards has grown by leaps and bounds. In a 2019 survey, 28.5% of businesses say they used payroll cards, a drastic increase compared to the 2% reported 4 years earlier.

While there are many benefits to offering payroll cards, it’s vital that you understand the dynamics of this payment option before extending it to your employees.

What is a payroll card?

A payroll card is a reloadable prepaid card that employers can use to disburse wages and other compensation to employees. Each payday, the employee’s take-home pay is deposited into their payroll card account, which is linked to a financial institution (or bank). The employee can then use the payroll card like a debit card, such as to make:

• ATM withdrawals
• Online bill payments
• In-store purchases

Payroll cards are branded with the payment network’s logo (e.g., Visa or Mastercard) and can be used anywhere that accepts the payment brand. Employees can withdraw or spend only up to the amount available on the card.

Personalized payroll cards

Payroll cards typically have personalization, meaning they bear the employee’s name. Each payday, the employee’s wages load onto their personal payroll card.

Instant issue cards

These are payroll cards without personalization — meaning they do not bear the employee’s name — that employers can use to make an immediate wage payment, such as:

• Final wages to a terminated employee
• Payment to a new hire who’s waiting for their personalized payroll card to arrive
• Payment to employees who have lost their personalized cards and are waiting for a replacement

Portable/flexible cards

Some payroll cards have a “portable” feature that enables employees to add money from other sources, such as a second employer or tax refunds from the government. The employee can continue using the portable card even if they change employers. (Note that if the card is not portable, it will stop working once the employee’s account balance hits zero, and will not accept funds from a new employer or other sources.)

How do payroll cards differ from direct deposit?

Direct deposit links to a personal bank account, whether checking or savings. To be paid by direct deposit, the employee must give their employer the account number and routing number for the bank account they want their wages to be deposited into. On payday, the employee’s wages are direct-deposited into the employee-designated bank account. With direct deposit, the employee can allocate different amounts of their pay to go into separate accounts, such as 50% into their checking account and the remaining 50% into their savings account.

To offer payroll cards, the employer goes through a third-party vendor, which can be a financial institution or a payroll card vendor that works with a financial institution.

Conversely, payroll cards do not link to personal bank accounts. To offer payroll cards, the employer goes through a third-party vendor, which can be a financial institution or a payroll card vendor that works with a financial institution. The vendor establishes a pooled account for the employer plus individual subaccounts for each employee who receives wages via payroll card. The subaccount belongs to the employee. Therefore, once the wages are in an employee’s subaccount, the employer cannot access the funds or view the employee’s payroll card transactions.

Employees may be able to allocate either their full net pay or a partial amount to their payroll card. Also, depending on the payroll card provider, employees may have the option to transfer money from their payroll card to their personal bank account.

What are the benefits of payroll cards?

For employees

• No personal bank account or credit checks are necessary. This is especially helpful to employees who do not qualify for — or want — a bank account
• Instant access to wages on payday; no waiting in line at the bank to cash paychecks or waiting for checks to arrive in the mail
• No check cashing fees, as there might be with paper checks
• Ability to make purchases similar to those allowed by a debit card
• Lowers the risk of losing cash
• Network-branded cards are normally insured by the Federal Deposit Insurance Corporation (FDIC)
• Most network-branded cards provide zero liability protection, which means the employee  is not responsible for unauthorized charges made on their payroll card
• Can use as an emergency savings card, to pay for unexpected expenses

For employers

• Simplifies payroll processing by decreasing reliance on paper checks
• Eliminates costs associated with processing, printing, and mailing paper checks and replacing lost or stolen checks. Employers can save $2.87 – $3.15 with electronic payments, as opposed to paper checks, according to the National Automated Clearing House Association (NACHA)
• Potentially increases productivity, since employees do not have to take time off from work to cash their paychecks
• Provides an alternative method of pay during disasters, such as the COVID-19 pandemic
• Promotes a paperless payroll environment, thereby saving time and money

What are some concerns about payroll cards?

Payroll card fees

In the past, payroll cards were heavily criticized for charging employees too many fees, such as for:

• Account maintenance
• ATM balance inquiry
• Declined transaction
• ATM withdrawal
• Out-of-network ATM usage
• Account inactivity
• Replacement card
• Point of purchase
• Cash reload
• Customer service

Exorbitant fees can be particularly problematic for low-income employees and employees who live paycheck to paycheck. Furthermore, if the fees drop the employee’s wages to below the minimum wage, the employer could face wage and hour investigations, lawsuits, and penalties.

To counter this issue, a number of states have laws limiting the payroll card fees toward employees. Moreover, most states require employers to offer a wage-payment method that allows employees to access their full take-home pay without having to pay a fee. Among the states that restrict payroll card fees are California, Connecticut, Delaware, Illinois, Maryland, Michigan, New York, North Carolina, Oregon, Tennessee, Vermont, and Virginia.

Currently, many payroll card providers keep their fees to a minimum. Some do not charge employees any fees for account maintenance, purchases, in-network ATM withdrawals, balance inquiry, or customer service. They charge only a minimal out-of-network ATM fee (e.g., $2) and an account inactivity fee (e.g., $5 after 12 months of inactivity).

Payroll cards have come a long way, and now have stringent regulations. As noted by the American Payroll Association, “Payroll cards are now widely recognized to be a lawful method of wage payment.” Further, most states “expressly authorize the use of payroll cards.”

Payroll cards have come a long way, and now have stringent regulations. As noted by the American Payroll Association, “Payroll cards are now widely recognized to be a lawful method of wage payment.”

Mandating payroll card use

Employers need to guard against forcing employees to accept their wages via payroll card. The Consumer Financial Protection Bureau expressly says that employers cannot require employees to receive their wages by payroll card. The employer must instead provide at least one other payment option, such as direct deposit, paper check, or cash. For example, you may give employees a choice between payroll card and direct deposit, or payroll card and paper check.

Which laws regulate payroll cards?

State laws

State payroll card laws vary. Commonly, they cover:

• Permitted fees
• Prohibited fees
• Employee choice and consent
• Worker access to wages and account information
• Employee disclosure, including terms and conditions
• Insurance requirements
• Wage and hour laws prohibiting below-minimum-wage payments

Fair Labor Standards Act (FLSA)

The FLSA governs federal minimum wage, overtime, child labor, and recordkeeping laws. Employers that offer payroll cards must beware of violating the FLSA’s minimum wage requirements.

Federal Electronic Fund Transfer Act (EFTA) and Regulation E

The EFTA and Regulation E impose specific requirements on payroll card issuers and employers, including with regards to:

• Disclosure of payroll card fees and terms and conditions
• Employee access to account statements
• Limitations on cardholder liability if the card has been subject to unauthorized use
• Responding to notifications about an account error

Payroll cards are also subject to FDIC insurance rules if the financial institution is insured, and federal banking laws such as the Bank Secrecy Act.

Should you offer payroll cards?

Whether you should provide payroll cards depends on the needs of your workforce and the strength of your resources. If all of your employees receive payment by direct deposit, then you likely do not have an immediate need for a payroll card program.

In the 2020 National Payroll Week survey, 93.87% of employees say they are paid by direct deposit. Despite this majority, a 2020 report by the FDIC states that 7.1 million (or 5.4%) U.S. households are unbanked. A different FDIC report shows that around 48.9 million U.S. households (or 18.7%) were underbanked in 2017. So, if you have unbanked or underbanked employees, you may want to strongly consider offering payroll cards.

Keep in mind, as well, that the payroll card trend is growing. “By 2022, a projected 8.4 million paycards will be active, compared with the 2.2 million people who were paid by paper checks in 2019,” according to a report by the American Association of Retired Persons. Moreover, payroll cards can play a favorable role in talent attraction, disaster preparedness, remote work arrangements, and employee financial wellness. Some employers offer payroll cards simply to give employees a range of payment methods to choose from, or to have the option available in case they hire unbanked or underbanked employees in the future.

If you’re leaning toward adopting a payroll card program, be sure to do your homework, including regarding cost and program management.

Employer cost

Payroll card program startup costs for employers vary by provider. Many vendors do not charge employers a setup fee or ongoing fees for a standard payroll card program, only for optional enhancements — such as card customizations, instant issue cards, or portable cards. Usually, the bulk of startup costs goes toward educating employees about the program and equipping them with supporting materials.

Program management

This includes:

• Introducing the payroll card program to employees
• Training employees on how to use their payroll cards
• Implementing a process for addressing employee complaints about the program
• Retaining records of wage payment elections
• Evaluating the program’s performance and making the necessary adjustments
• Staying on top of legal developments to ensure the program remains complaint

Some payroll providers offer payroll card services at no cost to their clients. So, if you have a payroll provider, you may want to check with them, as this may be your best option in terms of getting started and managing the program. Alternatively, you can choose from a list of reputable vendors — such as those recommended by the APA or the Society for Human Resource Management. In the end, you want a credible vendor that aims to deliver a positive experience for you and your employees.

For key elements of a good payroll program plus other best practices, see Consumer Action’s An Employer’s Guide to Payroll Cards.