There is a trend developing which involves paying employees their wages on a payroll card instead of through traditional means, i.e., check, direct deposit, or cash (although the latter is, perhaps, illegal). There are several legal issues surrounding this new method of paying employees.

Employees Pay to Get Paid

One of the principal concerns with paying employees using a payroll card is the fees assessed to the employee for the use of the card. Essentially, the fees cause the employee to pay to get access to his/her earned wages.

The Consumer Financial Protection Bureau (“CFPB”) has recently issued a statement directing employers to cease this practice as it is questionable, if not illegal in its view.

EFTA Violation

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Under the Electronic Fund Transfer Act (“EFTA”), it is generally illegal to require a consumer to set up an account to receive electronic fund transfers with a particular financial institution as a condition of employment. Requiring employees to receive their wages through this means as a condition of their employment is a violation of the EFTA.

In the CFPB’s view, the EFTA does not ban employers from requiring employees to catch up with the times and receive their wages electronically, only that the employee be able to choose which banking institution in which the funds will be deposited. Theoretically, this would allow the employee to control a piece of the process - work with his/her personal financial institution, as compared with the relationship the employer has with its favored institution.

Risks Outweigh Convenience

Generally, the CFPB has authority to enforce the EFTA against employers and the financial institutions that issue payroll cards to employees in violation of the EFTA.  Penalties for violations include civil liability permitting the recovery of actual damages, statutory damages of up to $1,000 in an individual action and up to the lesser of $500,000 or one per cent of the net worth of the defendant in a class action, plus costs and reasonable attorney fees.

Because of the available remedies in these cases, including attorney’s fees for prevailing plaintiffs, it would be wise for employers who are using these payroll practices to reconsider how they are implemented and how they can best protect themselves, while still providing an easy means for employees to get paid 100 per cent of their earned wages.