Flexibility for Employers and Employees

In an increasingly mobile society where employees often work multiple jobs and move around a lot, offering flexible payroll options can be a good recruiting and retention tool for some employers.

Payroll cards – an alternative to paper paychecks or direct deposit – are becoming popular in certain industries due to the flexibility they offer both employers and workers.

For employers, payroll cards provide a low-cost way to quickly pay employees regular wages, as well as non-wage payments such as tips or expense reimbursements.

For employees, payroll cards offer convenience, particularly for workers who do not have bank accounts or who rely on tip income. Payroll card providers use the same ACH system that is used for direct deposit, and the user’s account has a routing number and account number associated with it. But the employee has none of the pitfalls of a traditional checking account, such as the potential for an overdraft. If the account has insufficient funds, a card transaction will simply be rejected.

Despite their growing use in some industries, business owners should be aware of federal and state laws governing the use of payroll cards, as well as industry best practices.

What are Payroll Cards?

Payroll cards are reloadable debit cards that are funded with employee wages each pay period. Employees need to take no action to deposit their pay in an account and do not even need to have a bank account. Increasing numbers of workers, especially younger workers and those who move around a lot, do not maintain bank accounts.

According to the Federal Reserve, as of 2020 nearly 20% of American households with income under $50,000 did not have a bank account.

Payroll card holders may use their cards the same way all debit cards are used – to pay bills, make purchases at stores, and withdraw cash at ATMs. In some cases they may also make deposits (for a fee) to their accounts if they receive a paper check from another source. An electronic payroll “stub” with information about state and federal tax withholding, 401k deferrals and health coverage deductions is sent to each employee by email, or a paper copy can be mailed.

To offer payroll cards as an option, employers work with payroll card providers, many of which have user-friendly cloud-based systems for uploading payroll and employee data.

Industries that Use Payroll Cards

The use of payroll cards has been growing rapidly for several years in the restaurant and hospitality industry. For restaurant owners, it offers advantages in paying credit card-based tip income to servers.

Use of credit cards in restaurants has risen from about 60% of restaurant purchases to more than 90%, and many diners simply add the servers’ tips to the amount that is charged to their credit cards.

For these credit card-based tips, servers report their tips to management at the end of a shift, and management usually pays the servers in cash out of petty cash before the servers go home. However, with the rise in use of credit cards, many restaurants do not keep enough cash on hand to cover all the tips at the end of a shift.

By using payroll cards, a restaurant’s management can reconcile the credit card tips that are due servers the next morning and have the amounts added to the servers’ payroll card accounts by the end of the day. If you’re competing for labor, you don’t want to tell employees you’re holding on to their tips until the next paychecks are issued.

Payroll cards also offer flexibility and convenience for other industries that are spread out and have workers who move around a lot, such as construction and agriculture.

Federal and State Regulations

The federal Consumer Finance Protection Bureau has taken the position that federal law prohibits employers from offering payroll cards exclusively as a method of wage payment. Rather, they must offer at least one other payroll option such as paper paychecks or ACH direct deposit.

Additionally, most states regulate the use of payroll cards. In Kansas, workers must be able to take at least one ATM cash withdrawal per pay period – up to the full amount of their pay – without paying any fee. The state also requires employers who offer payroll cards to provide employees with education as to how to minimize any fees they might incur. Also, employers may not charge employees any initiation, loading or other participation fees to receive wages through a payroll card, except to cover the cost of replacing a lost or stolen card.

Even with these federal and state rules, payroll cards are largely an unregulated service with a history of high fees for both employers and employees. Business owners must be diligent about working with a provider that has a transparent and reasonable fee system.

Best Practices

To remain within the law and ensure that the use of payroll cards provides maximum benefits to your employees, the following measures are considered best practices:

  • Do not make payroll cards a mandatory or exclusive wage payment option in your company.
  • Work with a provider that has limited fees.
  • Educate your employees on use of the cards and disclose all relevant information, such as what the fees are and how to avoid them.
  • Ensure that the full amount of payroll can be withdrawn from an employee’s account each pay period without fees.
  • Ensure there is a reasonable number of ATMs or other options in your region where employees can make fee-free withdrawals and transactions.

If you would like to start a conversation about how payroll cards may benefit your employees and your business, contact your Adams Brown advisor.