What Employers Should Know When Considering Using Payroll Cards to Pay Wages

What Employers Should Know When Considering Using Payroll Cards to Pay Wages

Posted on 12-19-2017

What Are Payroll Cards?

Payroll cards—also known as payroll debit cards or paycards—are similar to bank debit cards. They are an increasingly popular method for employers to pay wages because they reduce the administrative costs associated with the processing and distribution of live, paper paychecks. Payroll cards can also be attractive to employees, as payroll cards eliminate the hassle and monetary cost sometimes associated with cashing live paychecks.

In a typical payroll card program, the employer chooses a bank or financial institution to issue the cards. Employees who opt for this method of payment establish payroll card accounts with that financial institution. Employers add wages to the payroll cards each pay period. Employees may then use the payroll cards for ATM withdrawals, bank teller withdrawals, debit card purchases, and cash back withdrawals.

As with other accounts, banks sometimes charge fees for the maintenance and use of payroll card accounts. These fees have been the subject of a few recent wage and hour cases and pose some risks for employers who wish to use payroll cards.

Case Law

For example, in Holak v. Kmart Corp., 2012 U.S. Dist. LEXIS 176331, at *4–5 (E.D. Cal. Dec. 12, 2012), plaintiff Amie Holak sought to bring a class action suit against Kmart Corp. alleging, among other things, that:

  • She and other putative class members were required to participate in a payroll debit card program if they did not elect to participate in direct deposit.
  • Kmart charged unauthorized transaction fees for the use of payroll debit cards and deducted the fees from their wages.
  • She and other putative class members could not withdraw all of their wages in a single transaction and incurred transaction fees with every ATM withdrawal after the first one in a given pay period.

Holak and other putative class members claimed Kmart violated Cal. Lab. Code §§ 212 and 221 by taking unlawful wage deductions and unlawfully discounting their wages. Holak, 2012 U.S. Dist. LEXIS 176331, at *11. Kmart successfully moved to dismiss Holak’s claims on the grounds that:

  • Participation in the payroll debit card program was optional
  • The terms and conditions, including the fee schedule, of the program were provided to participants –and–
  • The payroll card program provided two ways for participants to withdraw their entire paycheck on demand without paying any fees

Id. at *16–20. Although Kmart successfully defended the use of its payroll debit card program, this case illustrates the need for employers to consider all aspects, including the assessment and disclosure of transaction fees, when deciding to implement a payroll card program.

Likewise, in Ortiz v. Randstad North America, L.P., 2015 U.S. Dist. LEXIS 30660, at *6 (N.D. Cal. Mar. 12, 2015), plaintiff Adan Ortiz alleged Randstad owed him the full amount of his minimum wage because its payroll debit card program—which allowed for the imposition of transaction fees—did not comply with Cal. Lab. Code § 212. Randstad successfully moved for summary judgment relying on evidence that:

  • Its payroll debit card program allowed participants to obtain their wages at a number of locations, including VISA-issuing banks.
  • Randstad provided details, including when and how fees were imposed, in a welcome kit to the participants in the payroll debit card program.
  • Participants in the payroll debit card program received an itemized wage statement in the form of a pay stub.
  • Participants could make one transaction per pay period without incurring a transaction fee.

Ortiz, 2015 U.S. Dist. LEXIS 30660, at *8–10, 13. In addition, Randstad introduced evidence showing that Ortiz had used his payroll debit card on “hundreds of occasions” to obtain his wages without incurring any transaction fees. Id. at *10, 13.

Best Practices – Fee Disclosures

As noted from the cases above, fee disclosures are critical to minimizing the risks involved in implementing and maintaining payroll card programs. When advising employers on a particular payroll card program, you should pay special attention to the fee schedule that the card issue provides, as many fees are not always obvious. This is especially true concerning:

  • Balance inquiry fees
  • Fees for adding money to the card or loading fees
  • Out-of-network ATM fees
  • Fees based on caps on the number of uses of in-network ATMs
  • Overdraft or denied transaction fees –and–
  • Other miscellaneous fees such as fees for:
    • Online purchases
    • Receiving paper statements
    • Using a check instead of the card to obtain wages
    • Inactive cards –or–
    • Replacement cards

You can best handle these risks by ensuring the contract you negotiate with the card issuer specifically identifies all of the types of fees that the card issuer may charge. Also, to further minimize the risks that transaction fees pose, you should ensure that the card issuer cannot add or increase fees without prior written approval from the employer.

The use of payroll cards is governed by a patchwork system of federal and state laws. More states are introducing new regulations each year.

Federal Restrictions on the Use of Payroll Cards

The Fair Labor Standards Act (FLSA)

The FLSA requires employers to pay minimum wages and overtime wages to certain types of employees. See 29 U.S.C. § 201 et seq. The FLSA is silent on how employers must pay wages other than to say that wages must be paid “finally and unconditionally or ‘free and clear.’” 29 C.F.R. § 531.35. Wages are not paid “free and clear” if the employee is required to “kick back” a portion of the wages to the employer. Id.

The FLSA does not specify whether wages should or may be paid pursuant to check, direct deposit, or payroll card. However, any mechanism that requires the employee to bear administrative costs associated with the processing of payments may violate the FLSA if the imposition of fees results in the employee being paid less than the minimum wage for all hours worked or less than the full amount of overtime wages due.

Regulation E of the Electronic Funds Transfer Act (EFTA)

The EFTA is a 1978 federal law that governs electronic banking transactions. See 15 U.S.C. §§ 1693-1693r. In 2006, Regulation E, which implements the EFTA, was amended to apply to “payroll card account[s].” See 12 C.F.R. §§ 205.1-205.20.

In 2013, the Consumer Financial Protection Bureau (CFPB) issued guidance explaining Regulation E’s application to payroll cards. See CFPB Bulletin 2013-10. As explained by the CFPB, Regulation E covers payroll card accounts if they are “operated or managed by the employer, a third-party payroll processor, a depository institution or any other person.” Id.; see also 12 C.F.R. § 1005.2(b)(2).

Regulation E prohibits employers from requiring that employees accept payment by payroll cards issued by a financial institution that the employer selected. See 15 U.S.C. § 1693k(2); 12 C.F.R. § 1005.10(e)(2) and comment 10(e)(2)-1. However, Regulation E does permit employers to offer employees the choice between payment by payroll card and payment by some other means. Id. Therefore, an employer payroll card program run by a financial institution of the employer’s choosing is lawful so long as the employer provides employees the choice of accepting payment of wages by other means, such as a physical paycheck.

Regulation E provides various protections for those employees who receive wages on a payroll card including, but not limited to:

  • Requiring that the financial institution make certain disclosures to payroll card users, including disclosures about fees
  • Requiring that employees have access to information about payroll card balance and account history –and–
  • Mandating that financial institutions provide Federal Deposit Insurance Corporation (FDIC) protection to payroll cards, as well as protection from fraudulent charges

12 C.F.R. §§ 1005.7, 1005.9(b), 1005.18(b), (c).

The 2013 CFPB guidance noted that while the EFTA and Regulation E preempt state laws that conflict with the EFTA and Regulation E, nothing prohibits states from enacting laws or regulations that offer more protection to employees than the protections provided by the EFTA and Regulation E. See CFPB Bulletin 2013-10.

Final Regulations Issued under Regulation E and Z of the Truth in Lending Act (TILA)

In 2016, the CFPB released comprehensive final regulations under Regulation E as well as Regulation Z of the TILA. (Due to various concerns regarding overall implementation and compliance, the CFPB’s final regulations will not go into effect until April 1, 2018. See 81 F.R. § 83934.) The TILA covers the advancement of credit—including overdraft protection—on payroll cards and serves to “promote the informed use of consumer credit by requiring disclosures about its terms and costs.” 12 C.F.R. § 226.1 et seq.; 12 C.F.R. §§ 1005 and 1026. While the primary focus of these final regulations is on financial institutions that issue payroll cards, the CFPB also clarified certain aspects of the use of payroll cards in general and imposed additional requirements on employers maintaining payroll card programs in two central areas: (1) transparency and disclosure and (2) consumer protections.

Covered Payroll Card Accounts

First, the CFPB clarified that the final regulations only apply to payroll card accounts where an employees’ wages are regularly deposited. The final regulations exclude payroll card accounts where an employer deposits funds on an inconsistent basis or where the funds are not considered the employees’ primary source of compensation (e.g., emergency pay advances, bonus payments, travel or transit reimbursements, or payments related to flexible spending or health savings account reimbursements).

Hybrid Prepaid Credit Cards

The CFPB also included a new category of payroll cards in the final regulations called “hybrid-prepaid credit cards,” which can be subject to Regulation Z compliance under certain circumstances. For example, if the payroll card has a separate credit feature that allows an employee to access credit from a credit account or credit subaccount separate and apart from the payroll card account, the payroll card may be subject to Regulation Z. Additionally, if the payroll card’s credit feature is offered by the issuing financial institution or an affiliated business and the employee can use the payroll card’s credit feature to complete transactions or if the payroll card offers overdraft protection, it will most likely be subject to Regulation Z compliance. See 12 C.F.R. § 1026.61.

Disclosure Requirements

The final regulations also require a heightened level of disclosure by employers to employees who elect to use payroll cards by requiring employers to provide short-form and long-form disclosures. 81 F.R. §§ 84007-84009; see also 12 C.F.R. §§ 1005.18 and 1005.19. In addition, employers must notify employees of any changes in the terms or conditions of the payroll card program and must inform employees of the issuing financial institution’s name, website, and telephone number. See 81 F.R. § 84004; 12 C.F.R. §§ 1005.8, 1005.18(f) and (h).

Short-Form Disclosure

Employers must provide the short-form disclosure prior to any transactions occurring on the payroll card; this includes any payroll deposits made by the employer. To ensure strict compliance, employers should provide the short-form disclosure in writing prior to an employee’s election to participate in the payroll card program. 12 C.F.R. § 1005.18(b); 81 F.R. § 84019.

The short-form disclosure must contain the following information:

  • It must contain a statement that the employee can refrain from participating in the employer’s payroll card program.
  • The statement must indicate and list the employee’s payment options and set forth how the employee should inform the employer of their chosen payment method.
  • The disclosure must list the number of fee types as well as the particular fees associated with the use of the payroll card, even if they are not offered by the employer’s particular payroll card program, including any fees associated with purchases, inactivity, customer service, and ATM usage. Fees must be listed even if they result in $0.00 being charged to the employee.
  • The disclosure must also have a statement regarding overdraft and credit extension features, card registration, and government insurance coverage.
  • The disclosure must list the CFPB’s website and include instructions as to how an employee can obtain general information about payroll card accounts and where to find the long-form disclosure. See 12 C.F.R. §§ 1005.18 and 1005.19.

Long-Form Disclosure

Employers also must provide the long-form disclosure prior to any transactions occurring on the payroll card, including any payroll deposits made by the employer. The timing for the disclosure of the long-form mirrors the timing requirement for the short-form disclosure. As such, employers should provide the long-form disclosure in writing prior to an employee’s election to participate in the payroll card program and at the same time they provide the short-form disclosure. 12 C.F.R. § 1005.18(b); 81 F.R. § 84019. In addition to reiterating the information required in the short-form disclosure (see the subsection above on the short-form disclosure), the long-form disclosure must also include the following:

  • The title of the payroll card program
  • A comprehensive list of all fees and fee types associated with the payroll card program
  • The issuing financial institution’s name and contact information –and–
  • Instructions on how employees can submit a complaint to the CFPB regarding a payroll card account

See 12 C.F.R. §§ 1005.18(b)(4).

Common Requirements under State Wage and Hour Laws

State law generally governs how employers must pay wages because the FLSA is silent on this issue. No states have passed legislation outlawing wage payment by payroll cards. More than 20 states have enacted laws regulating the use of payroll cards. Generally speaking, state law regulations of payroll cards are similar to state laws regarding payment by direct deposit. These laws supplement and in some cases offer greater protection than Regulation E. For example, most states (including, among others, New Jersey, N.J. Admin. Code § 12:55-2.4(i)(1); Vermont, 21 Vt. Stat. Ann. § 342(c)(2)(C); and West Virginia, W. Va. Code § 21-5-3(b)(3)) allow employers to pay wages via payroll cards only if employees first consent, usually in writing. And some states (e.g., Maryland, Md. Code Ann. Lab & Empl. § 3-502(e)(2)(ii); Tennessee, Tenn. Code Ann. § 50-2-103(e)(D)(2); New Hampshire, N.H. Rev. Stat. Ann. § 275:43(II); and Nevada, Nev. Admin. Code § 608.135(2)(b)) mandate that employers disclose to employees any fees associated with payroll card accounts.

Consider State Breach of Contract Claims for Unpaid Wages

The FLSA regulates only overtime wages and minimum wages. It does not, for example, require that employers pay employees’ agreed-upon straight time wages. However, employees sometimes bring state law breach of contract claims for unpaid wages if payroll card fees have the effect of reducing the hourly wage earned by employees. To combat this risk, you should advise employers to ensure that employees have the right to access and withdraw—at least once per pay period—the total amount of wages deposited into their payroll card account without incurring any fees.

Payroll Card Laws Enacted in 2016

New York’s Payroll Debit Card Regulations

The New York State Department of Labor issued regulations governing the method of payment to employees, including comprehensive rules for the payment of wages by payroll debit card. These regulations were supposed to take effect on March 7, 2017. However, on February 16, 2017, the New York Industrial Board of Appeals issued an opinion and order revoking the regulations, finding that the New York Commissioner of Labor had exceeded her authority in promulgating them.

Connecticut’s Payroll Card Statute

On October 1, 2016, Connecticut joined the growing number of states allowing employers to pay employees using payroll cards, provided certain conditions are met. For an employer to use payroll cards in Connecticut, an employee must “voluntarily and expressly” authorize, in writing or electronically, that he or she wishes to be paid with a card “without any intimidation, coercion, or fear of discharge or reprisal from the employer.” No employer can require payment through a card as a condition of employment or for receiving any benefits or other type of remuneration. Conn. Gen. Stat. § 31-71k(b)(2).

Additional conditions that must be satisfied according to the statute include, but are not limited to:

  • Employers must give employees the option to be paid by check or through direct deposit.
  • The payroll card must be associated with an ATM network that ensures the availability of a substantial number of in-network ATMs in the state.
  • Employees must be able to make at least three free withdrawals per pay period.
  • None of the employer’s costs for using payroll cards can be passed on to employees.

Conn. Gen. Stat. § 31-71k, as amended by 2016 Ct. P.A. 16-125.

Pennsylvania’s Payroll Card Statute

On November 4, 2016, Pennsylvania enacted 2016 Pa. Laws 161; 2015 Pa. SB 1265 (codified at 7 Pa. Stat. Ann. § 6122.1) (effective May 5, 2017), which amends Pennsylvania’s Banking Code and governs the payment of wages through the use of payroll card accounts.

An employer must receive an employee’s written authorization to pay him or her by payroll card. 7 Pa. Stat. Ann. § 6122.1(1). See also 12 C.F.R. § 1005.10(b). Prior to obtaining this authorization, an employer is required to comply with stringent notice requirements, in writing or electronically. Specifically, the employer must give notice of:

  • All of the employee’s wage payment options
  • The terms and conditions of the payroll card account option, including any fees the employee may be subjected to by the card issuer
  • Notice that third parties may also assess fees in addition to those of the card issuer –and–
  • The methods for payment available to the employee for accessing wages without incurring fees

7 Pa. Stat. Ann. § 6122.1(4).

Employers may not make the payment of wages or other compensation by payroll card a condition of employment or other form of remuneration. 7 Pa. Stat. Ann. § 6122.1(3). When an employee makes a request to change the payment method from a payroll card to another payment method (e.g., check, direct deposit, etc.), the employer must honor the employee’s request as soon as possible, but no later than the first payday after 14 days from the employer receiving the employee’s request and any necessary information. 7 Pa. Stat. Ann. § 6122.1(9).

Employees must have the right to make at least one withdrawal from a payroll card account up to the full amount of wages for each pay period free of charge. 7 Pa. Stat. Ann. § 6122.1(5). Employees must also have the opportunity to obtain the balance on their payroll card accounts through an automated telephone system or other electronic means without charge. 7 Pa. Stat. Ann. § 6122.1(6). There also may not be fees for:

  • Applying or participating in the payroll card program
  • The issuance of an initial payroll card
  • The issuance of one replacement card per year upon the employee’s request
  • Transfer of wages and other compensation from the employer to the payroll card account
  • Purchase transactions at the point of sale –and–
  • Nonuse or inactivity of the payroll card account for a period of less than 12 months

7 Pa. Stat. Ann. § 6122.1(7). Funds in a payroll card account do not expire. 7 Pa. Stat. Ann. § 6122.1(8).

Pros and Cons of Using Payroll Cards


Payroll cards can benefit both employers and their employees, as they cut down on the administrative cost and hassle of dealing with live, physical paychecks. The reduction in paper also benefits the environment.

For years employers have sought alternatives to live paychecks because producing them can be expensive. Direct deposit of paychecks is popular, but many states (e.g., Florida, Fla. Stat. § 532.04(2) and Montana, Mont. Code Ann. § 39-3-204(2)) prohibit employers from requiring direct deposit. The U.S. Department of Labor also takes the position that employers cannot exclusively pay wages through direct deposit. See U.S. Dept. of Labor Field Operations Handbook § 30c00. Using payroll cards can be another attractive way for employers to minimize payroll processing costs, particularly with respect to low-wage earners.

Also, some employees may lack the finances or credit necessary to open bank accounts to be paid by direct deposit. These employees are typically paid by live paycheck. To cash their paychecks, some employees must wait in line and pay fees at check cashing businesses. Payroll cards may be an attractive alternative payment option for these employees.

Additionally, payroll cards are usually insured by the FDIC and offer fraud protection, which provides employees with security that is absent from a live paycheck.


The primary drawback to employers in using payroll cards is the relative infancy of this wage payment method. With states issuing new laws each year, it is possible that employers may unintentionally run afoul of some technical requirements and thus expose themselves to liability.

As stated above, payroll cards are an attractive option to employees who lack bank accounts for direct deposit payments. However, those employees with such bank accounts may prefer direct deposit and may find payroll cards to be cumbersome.

Best Practices for Establishing and Maintaining Payroll Card Programs

Establishing Payroll Card Programs

At the outset, you should know whether the employer’s employees are located in a state (or states) with particular payroll card regulations and tailor their payroll card programs accordingly. You should also advise the employer to partner with an experienced payroll card vendor that is familiar with the laws in all states in which the employer operates. In general, when developing a payroll card program, you should advise the employer to strive for a program that includes:

  • Offering employees the choice between being paid by payroll cards, direct deposit, or live paycheck
  • Requiring employees to sign consent forms stating that the employee’s choice to be paid via payroll card is voluntary and not a condition of employment
  • Permitting employees to cancel participation in the payroll card program immediately, and at any time
  • Offering a payroll card program that permits employees to withdraw, by a proximately located ATM or bank teller transaction, the full amount of their pay each pay period, with no fees charged for the withdrawal
  • Offering a name brand of payroll cards, such as Visa, MasterCard, or Discover, issued by a reputable bank with a widely available, surcharge-free ATM network
  • Providing employees with training and easy-to-understand information on payroll card program usage
  • Ensuring that the payroll card program provides employees with a cost-free means to check their balance and account history –and–
  • Ensuring that employees’ payroll card accounts are protected by DIC deposit insurance

When establishing a payroll card program and selecting a vendor, such as a bank or other financial institution, you must take special care to research and investigate the employer’s options. You must have confidence that the vendor can provide competent, legally compliant services in those states in which the employer does business. Some vendors may offer monetary incentives to employees that may appear attractive. But you must keep the employer’s focus on the quality of the program as a whole and not on the quality of the incentives that the vendor offers.

Maintaining Payroll Card Programs

The work does not stop when the employer implements the payroll card program. After the employer implements a payroll card program, you should review and audit the program at regular intervals to assess performance. You should assess, among other things, employee comments and complaints about the program and whether the program has resulted in savings to the company. If employee participation is low, or if there are questions about employee satisfaction, you and an employer representative should meet with employees to identify and address concerns. It may be advisable to adjust or change the program, based on employee comments and feedback. In addition, because this area of the law is evolving, you should keep tabs on any developments or changes to ensure that the program remains in compliance.

Kevin E. Vance is a partner with Duane Morris, LLP. His practice focusses on labor and employment litigation and other types of business litigation. Mr. Vance counsels businesses on a wide variety of labor and employment matters and drafts employee handbooks, employment agreements, releases, settlement agreements, and opinion letters. Mr. Vance also represents businesses in ERISA litigation matters and ADA public accommodation lawsuits. In addition to litigation in state and federal courts, he represents businesses before the Equal Employment Opportunity Commission, the National Labor Relations Board, the U.S. Department of Labor, and various state and local agencies. He is a frequent lecturer on labor and employment law topics. Julian A. Jackson-Fannin is an associate in the firm’s Trial Practice Group. Mr. JacksonFannin’s experience includes commercial, construction defect, and employment litigation. Prior to joining Duane Morris, Mr. JacksonFannin served as a law clerk to the Honorable Donald L. Graham of the U.S. District Court for the Southern District of Florida.

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