A few weeks ago, a reader e-mailed me a question about her son:

I’m trying to find out if my son can demand payment by check or direct deposit. He is 16 years old and working at Burger King.

Right now they load his payment onto a VISA card. Needless to say he can use an ATM, but that won’t allow him to withdraw the entire amount. He is able to transfer to a bank account, HOWEVER, the website states this could take 3-5 business days! That’s ridiculous!

The use of “pay cards” like the one our reader described has skyrocketed in recent years, mostly as employers try to reduce the costs of payroll-related expenses. This trend has not escaped the attention of the media or lawmakers. A New York Times article reported last year that ATM fees, inactivity charges, and other costs associated with these cards mean that employees can “end up making less than the minimum wage once the charges are taken into account.” Pay card programs triggered a broad investigation by the New York Attorney General’s office last year, as well as a federal lawsuit in Pennsylvania against a McDonalds franchisee and an investigation by the Department of Labor in its aftermath.

Last week, Illinois Governor Pat Quinn signed House Bill 5622, which amended the Illinois Wage Payment and Collection Act (IWPCA) to explicitly provide employers with the option of paying employees through a payroll card, but only with substantial restrictions. The situation described above would very likely violate the new Illinois law. As of January 1, 2015, when the law takes effect, employers can no longer require employees to receive wages on pay cards as a condition of employment. They must provide an alternative form of payment to their employees.

Employers who use payroll cards will be required to provide employees with a “clear and conspicuous written disclosure explaining the terms and conditions of the payroll card account option” including information on account and transaction fees.

Payroll card programs must also provide:

  • A means for employees to withdraw their full net wages every two weeks at no cost, at a location readily available to the employee;
  • On request, a monthly transaction history at no cost to the employee, showing all deposits, withdrawals, deductions, and charges to the payroll card account;
  • At least one of the following options to obtain the account balance at any time without a fee: online, by telephone, by text message, or at an ATM location;
  • Cards free from fees for declined transactions, point of sale transactions, loading wages by the employer, or program participation;
  • Limits on fees for account inactivity;
  • Cards that are not linked to any form of credit such as overdraft fees or overdraft service fees, loans against future pay, or cash advances on future pay or work not yet performed.

Nebraska passed a similar, albeit less detailed law in June, and more than half of the states have at least some laws or restrictions on the use of pay cards. Both Nebraska and Illinois set their laws to go into effect on January 1, 2015. The federal Consumer Financial Protection Bureau issued a bulletin last fall warning that it will not hesitate to aggressively apply federal law to employer pay card programs, even in the absence of state law protections.

Employer Insights

If you offer a program that does impose a list of fees or prevents employees from accessing their entire paycheck, it is time to think about phasing the program out or finding a new vendor. Even in the absence of state laws, which Nebraska and Illinois show are changing quickly, restrictive pay card programs are likely to attract unwanted attention from the media, state and federal regulatory agencies, and plaintiffs’ lawyers.

If you use pay cards, regardless of the state, it appears that a few bad apples might be spoiling the bunch (or as Ben Franklin had it, “the rotten apple spoils his companion”). Check your state laws regularly and prepare to meet ever-more stringent requirements if you implement pay card programs in the future.