HIGHLIGHTS:

• Effective Jan. 1, 2015, employers in Illinois will have to follow new requirements in order to pay wages using payroll cards, which offer cost savings to employers and convenience to employees, particularly those employees who do not have a bank account.
• The Aug. 6 amendments to the Illinois Wage Payment and Collection Act impose several minimum standards on payroll card programs. The amendments also severely limit the use of transaction fees associated with payroll cards.

Effective Jan. 1, 2015, employers in Illinois will have to follow new requirements in order to pay wages using payroll cards. The Illinois Wage Payment and Collection Act (IWPCA) currently provides for wage payment by check or direct deposit, but makes no mention of payroll cards. However, employers increasingly are transitioning to payroll cards as a form of wage payment. A payroll card is a reusable debit card tied to a special account where the employer deposits the employee's pay.

Payroll cards offer cost savings to employers and convenience to employees, particularly those employees who do not have a bank account. However, payroll card vendors often charge employees numerous fees that have the effect of materially reducing employees' wages. The Illinois legislature took notice of this and passed amendments to the IWPCA regulating the use of payroll cards. Gov. Pat Quinn signed these new Illinois amendments, P.A. 98-0862, into law on Aug. 6, 2014. With these amendments, Illinois joins a growing trend of states regulating the use of payroll cards as a means to pay wages. Several states currently have legislation pending on the use of payroll cards.

Requirements Employers Must Meet to Use Payroll Cards

The amendments to the IWPCA add payroll cards as a permissible method of paying wages, provided several conditions are satisfied. Before making a wage payment by payroll card, an employer must comply with the following requirements.

• An employer may not make it a condition of employment to receive wages by payroll card.
• The employer must provide the employee with a written notice, including all of the following information:
  • payment by payroll card is voluntary
  • the other means of payment available such as direct deposit or paper check
  • the terms of use of the payroll card, including an itemized list of all fees associated with the use of the payroll card by the employer and the payroll card issuer, and that third parties also may charge transaction fees
  • how the employee may obtain, without cost, the employee's net wages, the card balance and the paper or electronic transaction histories associated with the card
• The employer must offer another method of wage payment such as a direct deposit or paper check. Because employers may not mandate that employees use direct deposit, an employee always retains the right to be paid by a paper check or, if permitted by the employer, in cash.
• The employer must obtain the employee's voluntary written or electronic consent to receive wages by payroll card.

The Aug. 6 amendments to the IWPCA impose several minimum standards on payroll card programs. The employee must be provided at least one method of withdrawing the employee's full net wages from the payroll card once per pay period (but at least twice per month), at no cost to the employee, at a location readily available to the employee. The employee also must be permitted, once per month without cost, to obtain a transaction history covering all deposits, withdrawals, deductions or charges by any entity to or from the payroll card. The employee has the right to request the history in paper or electronic form.

The IWPCA amendments severely limit the use of transaction fees associated with payroll cards. No transaction fees may be charged for point-of-sale transactions. Transaction fees also may not be assessed for the application, initiation, or load of wages by the employer onto the payroll card, or for participation in the payroll card program. Transaction fees are not permitted for a declined transaction until the third declined transaction in the month. Finally, no inactivity fee may be charged until there has been one year of inactivity.

In line with the voluntary nature of payroll card use, the IWPCA amendments provide that an employee being paid by a payroll card has the right to change the method of payment to direct deposit or paper check upon request. The employer must honor this request within two pay periods.

In light of this extensive statutory regulation, employers currently using payroll cards should review their payroll card program to ensure compliance with these new amendments to the IWPCA.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.