Has your payroll department made the switch to paperless? If so, you may have realized significant cost savings, not to mention a reduction in clutter, filing and time spent answering questions. Congratulations on implementing one technology that demonstrates real value to companies taking advantage of it.
But hold up a minute, says the Consumers Union, best known as publishers of Consumer Reports. There are pitfalls you may not have considered when choosing your debit card vendor. That’s why, in conjunction with the National Consumer Law Center and the Electronic Payroll Coalition, they recently issued a set of core principles they hope will influence the way payroll debit cards work.
Suzanne Martindale, a staff attorney at Consumers Union, talked with us recently about traps into which employers may unknowingly fall when launching a paperless payroll system. “Employers really need to understand what to look out for, particularly in the area of fees,” she says. “We don’t want payroll debit cards to be more expensive than a paper check for employees to use.
“We understand that some employers are looking to go all electronic with their payroll, because paper is expensive. Other employers are very concerned that their employees who may not have a checking account, for example, are going to check cashing stores and may be subject to predatory lending practices from non-bank lenders.”
Payroll debit cards provide a simple way to address both issues. But, says Martindale, they can create different problems. “If the employer doesn’t negotiate a strong contract that prohibits certain fees that may be associated with the payroll cards, the employee may end up with a very expensive access device for getting his or her money. These are peoples’ wages, so we want to make sure they are able to get 100% of those wages.”
Watch out for excessive fees
Why wouldn’t employees be able to get 100% of their wages? Martindale says fees are the problem. “The employee may end up with a payroll card that, for example, gets socked with an inactivity fee if it hasn’t been used for awhile. Or if they want to take money out of an ATM and there are no free ATM transactions, they could be charged $2.50 each time they go to the ATM.”
“About half of the states have a state payroll card law, or a law that deals with payment of wages that include prepaid payroll cards,” Martindale continues. “They typically require that people get one free means of withdrawing all of their funds without cost. But if you’re a payroll cardholder and you walk into a random bank that’s supposed to allow you to do that, you may get a teller who is unfamiliar with your debit card and charges you a fee because you’re not a member of that bank.”
Martindale suggests that, as a first step, employers familiarize themselves with state and federal laws about payroll debit cards. Next, she suggests you explore your vendor options. One way to do that, she says, is to seek out help from government agencies that may themselves use payroll debit cards.
“There are some payroll card issuers that are banks, and some that are non-banks, so it is a good idea to make sure you have a reputable vendor, “ Martindale says. “When government agencies need a vendor, they issue a Request for Information (RFI), soliciting bids from payroll card vendors. A local or state government agency that is issuing its employees payroll cards may have some good background information on who the reliable vendors are. So that’s a place to start. Once you think you’ve selected a payroll card vendor that is a good, stable, responsible vendor, the next step is negotiating a good contract.
“What we always hammer home is that you need to make sure your payroll card doesn’t come with a bunch of fees for ordinary use of the card,” Martindale continues. “Make sure there is a reasonably convenient way to access the money on the card so someone can get their paycheck out at no cost, and really, more than once per pay period. Once every two weeks is not very convenient access to your own money.”
When negotiating with the vendor, make sure you understand exactly how they will hold the funds you send them. “If the money is in a pooled account, make sure they have very accurate accounting,” Martindale cautions. “Every cardholder should have their own individual FDIC insurance on the funds on their card – we have all seen banks go under. If the pooled account is the only one with FDIC insurance, it might not be a big enough cap to cover each employee.”
Payroll cards not good fit with credit lines
She also cautions against another common payroll card issue: lines of credit. These may be directly touted as loans, or simply be part of the new overdraft rules that apply to any checking account. “We want employers to make sure their payroll card program doesn’t have the option for taking out a line of credit against the employees’ payroll cards,” she says. “We don’t want to see anything that turns into a payday loan type of feature. We want the employee to have control over when those funds are taken out.
“And people often don’t understand that it is technologically possible to overdraw a payroll card. If you swipe your card and use the credit function where you have to sign for the purchase, there is a delay in processing the transaction, so it is possible to get an overdraft. But these cards fall under the same federal regulation that governs checking accounts, so if you don’t opt in to the overdraft program, the transaction would just be declined rather than overdraw the card. If you overdraft by $2 and get hit with a $35 overdraft fee, that’s an expensive loan! Better to let the transaction be declined.”
The Consumers Union and the National Consumer Law Center have a list of supplemental principles, too, you may want to see.