Taking The Check Out Of Paycheck: The Legality Of Payroll Debit Cards

by McNees Wallace & Nurick LLC

Recently, the practice of paying employees via payroll debit cards came under fire when an employee filed a class action lawsuit against her employer, a McDonalds' franchisee, alleging that payment of wages via a Chase Payroll Card violated the Pennsylvania Wage Payment and Collection Law ("PWPCL"). The employee claimed that the card's fees cut into her wages, potentially bringing her pay below minimum wage, and that she and other class members were not being "paid in lawful money" as required by the PWPCL. The case currently is pending in Luzerne County.

Pennsylvania employers, large and small, increasingly use payroll debit cards in lieu of printed paychecks. The Federal Deposit Insurance Corporation ("FDIC") recently estimated that employers will disperse $60 billion in wages via payroll debit cards in 2014. The cards save employers money and often make fund retrieval more convenient for the employee. As demonstrated by the lawsuit recently filed in Luzerne County, it remains unclear whether the use of such cards complies with Pennsylvania law.

In general, electronic wage payment by direct deposit or payroll debit cards has gained some traction with regulators. Some states use direct deposit and/or payroll debit cards to compensate state employees and to distribute government benefits. For example, Pennsylvania disperses unemployment benefits exclusively by debit cards and direct deposit. Additionally, the FDIC and the Federal Reserve Board implicitly recognized and accepted the use of payroll debit cards when the entities extended certain regulations to cover funds and accounts, respectively, related to the cards.

That said, there exists no definitive precedent in Pennsylvania addressing whether employers may pay wages strictly via payroll debit cards. None of the applicable laws or regulations mention payroll debit cards or clearly define "lawful money." In a 2008 letter, the Pennsylvania Department of Labor and Industry advised employers to obtain employee authorization before using alternative forms of wage payment such as payroll debit cards and direct deposit, but left unanswered the question of whether such payment forms can be mandated and exclusive. The Pennsylvania Department of Banking ("DB"), issued an opinion letter in 2005 and concluded that the specific payroll debit card program in question did not violate any of its regulations. The DB noted, however, that two important sections of a pertinent act, 7 P.S. §§ 6121 (Payment by cash or check; methods) and 6122 (Request for payment; agreement) were not within its jurisdiction despite being under the DB's chapter. At this time, it is unknown under what entity's jurisdiction those two sections fall.

The lack of federal regulation and very limited state law has led to varying rules throughout the states. Generally, states that allow the payment of wages via payroll debit cards require that the employee agree to payment by this method. Likewise, these states usually require that the employee can access the funds on the card at least once per pay cycle without incurring a fee (some states require greater access).

Another consideration for employers is whether to make the use of payroll debit cards a mandatory condition of employment. Pennsylvania courts have taken the position that the failure of an employee to complete a form authorizing direct deposit constitutes willful misconduct, making the former employee ineligible for unemployment compensation benefits. It remains unclear whether discharging an employee for refusing to authorize direct deposit or accept payment via payroll debit card would violate a public policy for purposes of a wrongful discharge claim.

Fees associated with payroll debit cards present another concern. While regulators often discuss direct deposit and payroll debit cards in the same breath, the key difference may be the amount of fees levied against the card user. Payroll debit card fees that reduce the employee's compensation below the minimum wage level likely would violate the federal Fair Labor Standards Act and Pennsylvania Minimum Wage Act. Even if the fees would not take the compensation below minimum wage or affect overtime compensation, they could constitute unlawful deductions from wages under the PWPCL.

While the legality of exclusively using payroll debit cards to pay employee wages remains in flux, an employer who wishes to disperse wages in this way should adhere to the following recommendations:

  1. Provide the employee with the option of either being paid by check, direct deposit or a payroll debit card, because it currently is unclear whether an employer lawfully may require that an employee accept payment of wages via a payroll debit card;
  2. Obtain signed authorization from the employee for payment via direct deposit or payroll debit card; and
  3. Use a debit card provider that levies no fees, and that allows the employee at least one fee-free withdrawal per pay cycle.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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