How Payroll Debit Cards Work

Employees and employers often use multiple payment methods depending on what works best. The traditional methods are direct deposit and check payments. Recently, employers have turned to payroll debit cards, also known as pay cards, which come with several advantages and drawbacks. 

If you’re an employee who wants to understand the fundamentals of a pay card, this article is for you. We’ll discuss how the payroll debit card works and the ways it can benefit you.

What Is a Pay Card?

A payroll card is typically an electronic prepaid card that employers use to send money to employees. Usually, the pay card is loaded with employees’ payments every payday. Therefore, if your employer offers to pay you with a pay card, you agree to receive your payment as a direct deposit on the card. 

Instead of a physical paycheck, you get paid on a card that works like an ATM card; they typically have Visa or MasterCard logos. You can use the card to make purchases on cash apps that accept prepaid cards or withdraw cash from an ATM.

How It Works

So how do pay cards work exactly? Employers prefer pay cards because they are time efficient and curb the hassle of printing several paychecks. They employ this method in agreement or contract with a third-party company that issues the pay card and handles other back-end activities.

A typical printed check costs between $1 and $2, but once pay cards are loaded with funds—the payroll debit cards charge 20 cents, and the employer covers the cost. Furthermore, since every process is done electronically, there is immediate access to said funds. Therefore, both parties have flexibility.

Pros

The Unbanked

A 2019 report from the FDIC shows that about 7.1 million Americans are unbanked. However, they can receive wages and payments via prepaid debit cards. Recent studies found that $34 billion was disbursed to 4.6 million active prepaid cards. 

The number is expected to reach about $68.9 billion on 10.8 million cards. A payroll debit card is ideal for employees that are unbanked since they don’t have checking accounts. 

These individuals are unable to open checking accounts because they are listed in the ChexSystems. ChexSystems is a central bureau that handles the database of consumers who have mismanaged their checking accounts in the past.

• Employers save more money with pay cards. Since they are reloadable, there is no need to purchase new cards every payday.

• Pay cards mostly work like debit cards and are used the same way.

• There are no monthly maintenance fees.

• You don’t need to visit the bank as you can access money anywhere.

Cons

While pay cards do not have maintenance charges, there are other charges and fees that can add up for the employee. These include:

• Activation fee
• ATM withdrawal charges
• Inactivity fees (if your card remains active for a certain period)
• Purchase fee
• Customer service fee
• Cash reload fee
• ATMs do not dispense money to the cent amounts; therefore, employees may not withdraw their real wages.

More Information

According to the Fair Labor Standards Act, employees should always have the option to receive their wages. Therefore, you may choose not to use a pay card. That said, employers cannot force employees to use pay cards. They must find or provide alternatives.

Additionally, based on information from a consumer Finance Protection Bureau Bulletin, pay cards must meet the Federal Reserve Regulation’s standard rules. This states that:

• Employees must know of fees chargeable by a pay card.
• Card issuers must provide the card’s transaction history upon request.
• The employee’s liability for unauthorized card use remains limited.
• Financial institutions must attend to a consumer’s report of errors if it is within a stipulated period.

The payroll card regulations make the method controversial, especially as employees may not withdraw their full pay.

Federal Pay Card Laws

Workers who receive their wages electronically are protected by the Electronic Funds Transfer Act (EFTA) and Regulation E. These laws state that employers are providing additional payment methods aside from pay cards. 

Also, employers are bound by the law to disclose terms, conditions, and fees that may apply. Besides, the Fair Labour Standard Act (FLSA) ensures the payment of the federal minimum wage. A pay card can, therefore, not reduce a worker’s pay below the minimum wage.

State Pay Card Laws

Note* Alabama, Idaho, Indiana, Louisiana, North Carolina, New Mexico, Mississippi, Ohio, South Dakota, Wisconsin, and Wyoming do not have specific laws or regulations.

Partner With a Payroll and Tax Expert

Payroll cards can get complicated quickly, but you don’t have to do it all on your own. You can save time and money and make your payroll more efficient by handing off your payroll to a professional. 

Small business owners are responsible for a lot, so it’s understandable to outsource specific tasks and lighten their load. Payroll is an area where mistakes can be costly, so consider the benefit of using innovative payroll software through 1-800Accountant. When you partner with our team, you’ll gain the support and expertise you need to keep your employees paid on time.