A pay card (also known as a payroll card) is a prepaid debit card employers use to pay employees who don’t have bank accounts. Although regulated by federal and state law, they’re similar to direct deposits in that money is sent electronically, and setup is sometimes free. Pay cards are available from dedicated providers, banks, or payroll companies.
If you’re wondering what a pay card is good for, the answer is that it’s great for providing employees with easy access to earned wages. So, if you’re already utilizing payroll software to run your payroll, it’s a good idea to check whether they offer pay cards. Some providers will offer pay cards free to customers, while others charge fees for setup, ATM withdrawals, and even inactivity.
How Pay Cards Work
Payroll cards work similarly to direct deposits, except employee pay is transferred to a prepaid debit card instead of directly to an employee’s bank account. Once the money transfers, funds are available immediately, and the employee can use the card to withdraw money from an ATM or make online or in-store purchases. Per federal law, employees should be able to access their funds immediately and free of charge.
To implement a pay card program, you’ll have to find a provider. Typically, there’s an enrollment process, and you’ll have to sign up before you can begin. Setup can last from a few days to a few weeks, and you should receive training materials to help explain the process to employees who opt to participate. Cards are mailed after setup is complete.
In addition to pay card providers, some payroll software can set up direct electronic payments to third-party pay card providers in the same way you would set up direct deposit. Additionally, you may be able to set up pay cards with your existing payroll service provider, bank, credit card company, or even a professional employer organization (PEO). Some of these providers offer additional services to your business beyond merely providing pay cards.
Types of Pay Cards
If you’re considering pay cards, you have several options:
- Reloadable Pay Cards: Used widely across industries, these cards are loaded with the employees’ wages each payday. They function like a debit card, allowing employees to withdraw cash or make purchases directly. However, they often come with various fees such as loading and transaction fees, so be sure to review the fee schedule meticulously.
- Non-reloadable Pay Cards: These are single-use cards loaded with an employee’s pay for one pay period. After the funds are used, the card cannot be reloaded. While this eliminates recurring fees, the need for a new card each payday could be inconvenient.
- Brand-Specific Pay Cards: Some cards are tied to specific brands or retailers, offering rewards or discounts when used at these locations. This can be an enticing perk for employees but may limit where they can use the card.
Typical Pay Card Fees
Federal law requires employees to get access to their net pay without add-on costs. While your employees won’t have to pay any fees, you might need to.
Some providers charge a nominal fee for issuing a payroll card, typically ranging from $3 to $5 per card. This is a one-time cost that covers the production and delivery of the card to the employee.
Some providers may charge your business a maintenance fee of $2–$5 per month. This covers the costs associated with managing the account, such as customer service and account maintenance.
Another common fee is the ATM withdrawal fee. While some providers offer a certain number of free ATM withdrawals per pay period, additional withdrawals may incur a fee, usually around $1.50 to $2.50 per transaction.
Other potential charges include balance inquiry fees, paper statement fees, and inactive account fees. These can add up quickly, so it’s important to review the fee schedule carefully when choosing a pay card provider.
Payroll Cards vs Debit Cards
Although payroll cards are similar to debit cards, they aren’t the same. Debit cards are linked to funds deposited into a bank account; without a bank account, there can be no debit card.
Payroll cards aren’t associated with bank accounts and come with their own separate account from the provider. Employers load money to the account in advance, and it’s usually impossible to spend more than the prepaid amount; this lessens the chances of overdraft fees.
Federal Restrictions on Payroll Cards
Pay cards are restricted by federal law, which means no matter which state you’re in, you must comply. The purpose is to protect employees from being unfairly impacted when receiving wages. The key to complying is to be transparent, ensure all employees know what a pay card is, and recognize that an employee’s participation in a pay card system is always optional.
Here are the requirements your business should meet when implementing a pay card program:
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- Ensure employees receive minimum wage: The Federal Labor Standards Act (FLSA) governs overtime, minimum wage, and other labor laws. Be aware of any unavoidable fees your employees must incur to withdraw their wages (like ATM fees); if the deductions reduce their earnings below minimum wage, you could be liable.
- Offer an alternative: You’re not allowed to force employees to participate in the company pay card program, so you must offer an alternative option. Per federal law, the alternative can be direct deposit or paper check, but you should check your state law for additional legislation.
- Issue a disclosure: You must issue a disclosure to employees that lists all fees that may be incurred, including the types of electronic transfers they can make. You should also disclose all the details of the pay card program and inform employees that participation is optional.
- Provide account history: You must ensure the provider you choose provides periodic transaction statements or an electronic transaction history covering the last 60 days or the option to check account history by phone and to request a written history of account transactions covering the prior 60 days.
State Laws on Payroll Cards
State laws differ in their requirements for businesses that issue payments using pay cards. You’re required to offer an additional payment method, but whether it can be electronic (direct deposit) is determined by each state.
For example, New York and California, shown in gray on the map below, allow employers to offer a pay card option, but only in addition to a paper check. A paperless system isn’t permitted as the only option in these states. However, states shown in blue, like Texas, permit a paperless pay system like direct deposit and pay card only. They don’t require you to offer a paper check option.
In addition, most states have pay card regulations, such as requiring free ATM withdrawals or ensuring some way for the employee to receive their full pay without paying service charges.
Pros of Offering Pay Cards for Employers and Employees
Offering a pay card option can save your business money, especially if you’re paying bank fees to send wages through direct deposit. Employees also benefit from more convenience and faster pay options.
Here are some of the advantages of offering payroll cards:
The most common reason that a business would want to provide a pay card option is that it’s more convenient for workers who don’t have a bank account. According to the Federal Deposit Insurance Corporation (FDIC), 4.5% of households don’t have a bank account. The FDIC refers to these individuals as unbanked or underbanked.
A pay card is similar to a direct deposit in that the employer transfers payroll funds to the employee’s account on payday. The difference is that instead of the money going to an employee’s bank or credit union checking account, paid wages are added to the employee’s payroll debit card.
Paper checks can be withdrawn weeks and even months after issue. So in addition to saving administrative time, you’ll save time reconciling your accounts or worrying about escheatment, the process that occurs when personal property, like bank accounts, are abandoned (usually due to death) and transferred to the state.
A pay card saves you money over standard paper checks, whether in time spent printing and distributing them or in the cost of paper and postage. Like direct deposit, it typically costs you nothing—other than potential minimal set-up fees and monthly maintenance fees—to offer a pay card option to employees, although some payroll vendors may have an upcharge for managing electronic payment options.
Let’s say you run payroll every other week for 25 employees. That’s 26 payrolls per year for 25 employees at 50 cents for each standard first-class stamp at the post office. That would cost $325 a year just in postage; your administrative time, paper, and envelopes cost extra. Also, if checks are lost, voided, or reissued, that costs even more. With pay cards, once payroll is processed, the money is there.
Check fraud occurs when someone steals your business information, such as the routing number on your checking account, to obtain unauthorized access to funds. It can also occur when someone modifies the check, such as changing the amount or the recipient’s name.
However, even if a pay card is lost or stolen, it’s less risky than a check. The pay card, like any prepaid debit card, requires the use of a personal identification number (PIN) to obtain funds; this reduces the risk of unauthorized use. The pay card itself can be replaced, though often for a fee.
Cons of Offering Pay Cards for Employers and Employees
There are some drawbacks to using pay cards. Federal and state laws govern the usage of pay cards by employers, and failing to comply can result in fines and penalties from government agencies, and employee lawsuits. Also, if not careful, employees can rack up hefty fees, such as by withdrawing from non participating banks.
Here are some of the disadvantages of offering payroll cards:
Be aware of fees your employees may be charged with the use of some payroll cards. Some ATMs charge costly service fees, as much as $5 or more per withdrawal. Banks may also charge employees to check balances or withdraw funds, while reputable providers will offer only a number of free ATM withdrawals each month.
Payroll cards are regulated per federal and some state laws, which means you must educate yourself before making it an option for your employees.
To protect yourself, you’ll have to spend time researching and staying abreast of new pay card laws.
Temporary Loss of Funds Access Due to Fraud
Unlike direct deposit, payroll cards can be lost or stolen. All it takes is for an employee to accidentally drop the card at a store or forget to retrieve it after handing it to a cashier for payment. Typically, providers have dispute systems in place to guard against fraudulent charges. However, reporting fraud will result in cancellation of the card, and the employee could be without access to funds for several days or more, potentially leading to legal issues for your business.
Alternatives to Pay Cards
Pay cards aren’t the only game in town—there are a number of ways to pay employees. Here are a few:
1. Direct Deposit: The most common alternative, direct deposit transfers an employee’s wages directly into their bank account. It’s convenient and usually free, but it requires employees to have a bank account, which isn’t always the case.
2. Paper Checks: Old school but still reliable, paper checks are a universal method of payment. They do, however, require time and resources to produce, and employees need a place to cash them.
3. Payroll Apps: Emerging technology has given rise to payroll apps that allow for instant payment and easy tracking. These apps offer flexibility and convenience but be aware of potential digital transaction fees.
4. Cash: Cash payment is straightforward and eliminates the need for bank accounts or digital literacy. However, it’s not ideal for record-keeping and isn’t secure. For these reasons, while it is an alternative to pay cards, we cannot recommend paying employees in cash.
Learn more about each method and how to push through with them in our guide to the different ways to pay employees.
Implementing a Pay Card Program—5 Steps
Step 1: Do Your Homework
Before anything else, you need to understand the ins and outs of pay cards. Take time to arm yourself with knowledge, from the payroll card definition to how it should work and the fees involved. Tap into resources from the Consumer Financial Protection Bureau (CFPB) or consult with a financial advisor.
Step 2: Choose Wisely
Selecting a pay card provider isn’t just about who offers the shiniest card. Look deeper. Consider things like fee structures, customer service, and card features. A low-fee or fee-free option is ideal. And don’t overlook the fine print. That’s where the devil often hides.
Step 3: Communicate With Your Employees
Once you’ve chosen a provider, it’s time to talk to your employees. Be transparent about why you’re considering pay cards and what it means for them. Discuss the pros and cons openly. While you may be shouldering some of the cost, this is their livelihood so be ready for questions.
Step 4: Education, Education, Education
Conduct training sessions to explain what is a pay card and how it works. Show your employees how to check their balance, withdraw cash, and avoid fees. Make educational materials available for future reference. And remind them they have other payroll options. It’s their money, and they should have the final say in how they receive it.
Step 5: Rollout and Support
With the groundwork laid, roll out your pay card program. Be available to answer questions, address concerns, and provide support. This isn’t a set-it-and-forget-it situation. It’s a process.
Bottom Line
While offering pay cards is a great option for employees without bank accounts, it is just one way you can pay your employees and shouldn’t take the place of other payment methods like direct deposit. You have multiple provider options to choose from, including payroll services, that support both. Many providers allow you to enroll for free; just remember to let employees know it’s optional, and make sure you’re abiding by state and federal laws.
