WASHINGTON, August 12, 2013 — More employers are paying employee wages via prepaid payroll debit cards. As employees begin to feel the high costs of a largely unregulated sector of the banking market, large corporations and banks increase profits unscrupulously.
Some employers—usually large retail and restaurant chains—have replaced traditional checks with prepaid debit cards to pay their hourly employees. Employees can use these cards like any other debit card to make purchases, pay bills, transfer funds, and withdraw cash at an ATM.
However, prepaid debit cards charge high fees for balance inquiries, ATM withdrawals, over the counter withdrawals, automatic bill pay, purchases, balance inquiries, and transfers to a checking account. The fees can be so high that some employees actually end up making less than the minimum wage.
The practice of a number of companies making payroll debit cards the only payment option for certain employees has recently come under fire.
According to the Site Group research firm, $3.4 billion was put on to 4.6 million active payroll cards in 2012. Figures are expected to reach $68.9 billion in 10.8 million cards by 2017.
Companies like McDonald’s, Taco Bell, Walgreens, Victoria’s Secret, The Limited, and Wal-Mart use these cards to pay their hourly employees. Prepaid cards are issued by most major banks and credit card companies, including Chase, Bank of America, Wells Fargo, and Citigroup, as well as several other less-known issuers.
The law in 25 states allows employers to pay wages through direct deposit or prepaid cards instead of traditional checks. Laws in other states are less clear. A handful of states require payment in cash or check.
Banks and card issuers claim that they can save companies a substantial amount over using conventional checks. For example, the Visa payroll card savings calculator estimates $1,980 in annual savings for a company with 100 employees and $39,600 for a company with 2,000 employees.
Other issuers claim that payroll cards save employees check cashing and money order fees. Employers and banks also claim that the cards are convenient for employees who do not have a bank account because payroll cards carry lower fees than regular check-cashing services.
Due to a largely unregulated market, some card issuers offer employers money outright for every employee signed up for the debit card program. A New York Times investigation revealed that Citibank and the New York Housing Authority (NYHA) have a contract whereby the NYHA receives one dollar for each employee it signs up to the payroll card program.
Issuers and banks are making millions on fees associated with payroll debit cards. Losing income from new regulations governing credit and debit card fees, banks can recuperate lost revenue in the largely unregulated payroll debit card market.
For example, while a bank with over $10 billion in assets is prohibited from charging overdraft fees on checking accounts, employees with payroll debit cards can be charged $30 or more in overdraft fees, called “balance protection.” Similarly, while banks cannot charge inactivity fees for debit or credit cards, no such protection exists on prepaid cards. Many cards charge $7 to $10 for inactivity of more than 60 days.
While offering prepaid cards may be useful to some employees and is perfectly legal, companies may run into problems if the payroll debit cards are the only form of payment they offer employees. The same is true if companies offer a choice between prepaid cards and checks or direct deposit, but employees are automatically enrolled in a debit card program which often involves a great deal of time and paperwork to opt out of.
In June of this year, lawyers for Natalie Gunshannon and other employees filed a class-action civil suit against a Pennsylvania McDonald’s franchisee owner, claiming that the fees imposed by the debit card—the only payment option given—dropped several employees’ earnings below minimum wage.
The suit also alleges that by not offering Gunshannon and other hourly employees an alternative method of payment, the employers are in violation of Section 3 of the Pennsylvania Wage Payment and Collection Law (PDF), which states that “wages shall be paid in lawful money of the United States or check.”
Since the lawsuit was filed, the franchisees have announced that employees at their 16 outlets are no longer required to accept the prepaid cards. McDonald’s—not named in the suit—has reiterated that it leaves it to franchisees to determine the best way to pay employees as long as it is within the law.
The New York State Attorney General’s office recently announced that it is investigating the payroll practices at national retail chains including Olive garden, Home Depot, and Wal-Mart. Surprisingly (or not), even some states have begun to issue benefit payments through prepaid debit cards.
The class action lawsuit against McDonald’s franchisees is pending, but the outcome should indicate how courts will respond to this practice in the future.
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