Consumer Finance Insights
June 27, 2014

N.Y.’s “Payroll Card Act” A Sign of Increased Regulation of Payroll Card Programs

Legislators in New York are considering a bill that would impose new regulations on employers’ use of payroll cards as a means of paying employees.  Bill A. 10056, which was introduced in the State Assembly on June 10, 2014, proposes to amend § 192 of New York’s Labor Law and would impose various restrictions on the use of these cards.

Payroll cards, which are reloadable prepaid cards that work much like debit cards, provide employers an innovative method of paying employees who may not have bank accounts and would otherwise need to be paid by cash or check.  These cards offer employees the benefits of increased security, easy access to their paychecks, and the ability to make purchases and pay bills online.  Employers find them beneficial as well because they significantly reduce costs associated with producing paper paychecks and they help protect against fraud and lost or stolen checks.  Bank issuers also have embraced payroll card programs, because they offer banks a new way to reach more customers.  These benefits have led to a dramatic increase in the use of payroll card programs: according to financial research firm Aite Group, in 2013, $42.8 billion was paid to U.S. employees through payroll cards; that number is expected to increase to nearly $70 billion by 2017.

Recently, however, the use of payroll card programs has drawn criticism from regulators and consumer advocates, who claim that various fees and restrictions on cash withdrawals have the effect of reducing employees’ pay.

In response to these concerns, several states, including California, Hawaii, Nebraska, Pennsylvania, and Illinois, have begun investigating payroll card programs and instituting statutes regulating their use.  New York’s proposed law, while authorizing the use of payroll cards, would impose several notable requirements on employers wishing to use the payroll card program to pay its employees:

  • Employers would have to obtain employee consent before using a payroll card to pay each employee;
  • Employees could revoke that consent at any time and their employers would be obligated to use another method of payment;
  • Before obtaining consent, employers would have to provide employees with information about the terms and conditions of the payroll card program, including explanations of time limits for disputing charges, information on how to close a payroll account, lists of locations within ten miles of the place of employment where employees can access wages without incurring a fee, lists (in at least size 14 font) of any fees that may apply, and descriptions of the methods of avoiding those fees;
  • Payroll card programs could only be used if employees were provided with at least one network of ATMs at which employees could make unlimited cash withdrawals and balance inquiries without incurring fees; and
  • Employers would not be able to pay wages through a payroll card program that charged cardholders any fees for account initiation, inactivity, account maintenance, point-of-sale transactions, declined transactions, closing an account, issuance of a replacement card, or any undisclosed fees imposed by the employer.

Notably, these provisions seek to regulate employers wishing to pay employees through payroll cards, not bank issuers providing the payroll cards products themselves. However, critics of the “Payroll Card Act” worry that increased regulation will reduce employers’ use of payroll card programs, negatively affecting all parties involved.

To mitigate this impact, financial institutions should evaluate their payroll card products to ensure that the cards they offer comply with the new requirements and that, as more states consider regulating the use of payroll card programs, that they offer product options that make it easy for employers to comply with the law.

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