To build efficiencies in the payroll process by eliminating paper checks, employers have used direct deposit since the mid-’70s. This effort to eliminate paper checks was always limited because many employees had no bank accounts. Since ATMs appeared, the ability to pay employees via a paycard has slowly become available.
What Is A “Paycard”?
Paycards are employee debit cards that employers deposit wages onto. Paycards are a speedier alternative to receiving paper checks for employees who aren’t banked and are sometimes preferred because they work much like direct deposit. Each pay period, payday earnings are loaded onto the card, which can be used to make purchases, or, if the employee prefers, withdrawn in the form of cash from certain ATMs and banks.
Federal And State Requirements
Currently, the biggest drawback to using paycards is that state and federal laws typically do not allow an employer to mandate direct deposit or paycards. This is changing. Many states now allow employers to mandate paycards for unbanked employees. However, currently, Federal law does not allow mandating paycards for unbanked employees, and as a result, there is some confusion surrounding the issue.
Currently, 16 states and the District of Columbia have no law regarding paycards. This includes New York, whose law was struck down in 2017. The 34 states that do have regulations vary. Employers will have to inquire clarification in any state they intend to use paycards to pay employees.
Current Issues Surrounding Paycards
Several issues surround the use of paycards. The issue of fees to employees is a primary concern. Most regulations require that an employee can convert 100% of their pay without fees. This may be limited to the ability to access all of the funds at least once per pay period. Fees for having the card are typically not allowed or must be paid by the employer. Any potential fees must be disclosed to the employee. Other issues include:
- Lost cards
- The ability to mandate cards or obtain a signed authorization from the employee
- Access to pay-stub details
- Access to account history
- Regulation E protections for unauthorized transfers
In short, employers must research the state laws they will be required to follow. Paycards are becoming more common, and the legislation seems to be trending more friendly and, if managed properly, can be a substantial move towards eliminating paper checks.