Payroll cards, onto which companies load workers' wages,are growing by leaps and bounds. Their popularity is being drivenby the savings the cards afford employers and the growing number ofemployees without bank accounts. But the cards have also become atarget for state legislators and regulators over the last year.

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“We're moving into a climate of tighter regulation of payrollcards,” said Patricia Smith, a partner at the law firm BallardSpahr.

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That could spark concerns for many companies nationwide.According to Aite Group, $34 billion was loaded onto 4.6 millionpayroll cards in 2012, up from $20.9 billion loaded onto 3.1million cards in 2010. Aite's analysts predict the use of payrollcards will grow at a compound annual rate of 19.9% through 2017,when they project that there will be 10.1 million paycards in use,with $68.9 billion loaded onto those cards annually.

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Proponents say the cards benefit both employers and employees.NACHA estimates companies save from $2.87 to $3.15 each time theypay a worker by direct deposit rather than with a paper check, andthe savings for using a paycard are comparable. According to theAite report, about 90% of U.S. workers were paid via direct depositin 2012. Paycards help companies eliminate even more paper checksby extending electronic payments to workers who don't have bankaccounts.

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For those workers, being paid with a payroll card rather than apaper check sidesteps check-cashing fees, and many paycards canalso be used to make purchases at stores or online.

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However, the uptick in proposed legislation and regulatoryinquiries into payroll cards followed newspaper coverage last June of a class action lawsuit in whicha Pennsylvania woman sued her employer, a McDonald's franchisee,for offering a payroll card as her only option for receiving herearnings, said Bill Dunn, director of government relations at theAmerican PayrollAssociation. The suit alleged that the card's fees would havereduced her earnings below the minimum wage.

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Cards Under Scrutiny
Since then, state legislators and regulators have been looking atthe fees on payroll cards and the question of whether employees aregiven options. New York State Attorney General Eric Schneidermanlaunched an investigation and issued a reportconcluding that while payroll cards provide some benefits foremployees, “they also have drawbacks for many low-wage workers,especially the 24% of low-income adults who lack Internetaccess.”

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Over the past year, Dunn said, 19 states have consideredlegislation addressing payroll cards, although only four havepassed anything. Some of the bills “weren't terriblycontroversial,” he said. “Others were quite a challenge.”

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The legislation initially proposed in Hawaii would have bannedpayroll cards, but the final version combined “consumer protectionsand allowing flexibility for employers,” he said. A New Hampshireproposal would have been “very restrictive” but didn't go anywhere,Dunn said, while legislation proposed in New York would “make itdifficult for some companies to offer payroll cards because of someof the key provisions.” The New York legislation, put forward bythe attorney general, would require employees to give their writtenconsent to be paid via a paycard and would limit the feesassociated with the cards.

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Last September, the Consumer FinancialProtection Bureau issued a bulletin reminding employers that under federal law, theycannot mandate that employees receive their wages on a payrollcard. They have to offer another payment method as well, with thealternative payment type governed by state law.

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“The number-one thing employers should do to avoid anyregulatory risk is be sure they don't force their employees onto apaycard,” Dunn said. “Employees have to have a choice—they have tohave an alternative to a paycard.

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“In about half the states, you don't need to offer paperchecks,” he added. “But you still need to offer a choice; you needto offer direct deposit. If you're not offering any choice at all,that's a big red flag that you're in regulatory trouble.”

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Ballard Spahr's Smith noted that, “for the most part, employeraspects fall under state law,” including wage and hour laws andwage payment statutes. Employers that plan to start using payrollcards should make sure that what they're doing meets therequirements that are being put in place by states, Smith said.

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“The most common one is that the employee's consent has to beobtained in writing before the employer utilizes the card,” shesaid. “And that consent has to be freely given. It cannot be made aterm or condition of employment.”

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Patricia Smith of Ballard SpahrAnother widespreadrequirement is that workers should be able to withdraw their totalwages once each pay period without paying a fee, said Smith,pictured at left. “The employer generally under these statutes isrequired to furnish a statement of deductions to the employeesevery pay period. It can mean a paper statement; under somestatutes, it can mean the ability to access the information on acomputer and print it out for free.

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“The other very typical requirement is for employers to discloseto the employees the potential fees they can incur in connectionwith the card,” Smith said. “There are a lot of fees that can kickin and perhaps be a trap for unwary employees. Some cards have manymore fees connected to them than others. Some have balance inquiryfees; others do not. Some have inactivity fees; some do not. Somehave withdrawal fees; some do not.”

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Some payroll card providers have put together state-by-statematrices to guide employers through the different requirements,said Madeline Aufseeser, a senior analyst at Aite Group.

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Still, “it's the employer who's ultimately responsible,”Aufseeser said. Employers “should be aware of the state wage andlabor laws and work with their payroll provider to make surethey're doing this properly.”

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Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.