A payroll card (pay card) is a prepaid debit card employers used to pay employees who don’t have bank accounts. Although regulated by 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 (FlexWage or VISA), banks, or payroll companies.
You can pay your employees using a payroll card instead of, or in addition to, a paper check or direct deposit. Pay cards offer some advantages, specifically that employees don’t have to visit a bank to access their money. If you’re already using a payroll software service, it’s a good idea to check whether they offer them; some will provide pay cards free to customers, while other providers charge fees for setup, ATM withdrawals, and even inactivity.
How Payroll Cards Work
Payroll cards work similarly to direct deposits, except employee paychecks are transferred to a prepaid debit card instead of a bank account. Once the money transfers, funds are available immediately, and the employee can use the card to withdraw money from an automated teller machine (ATM) or make purchases (online and in-store). Per federal law, employees should be able to access their funds immediately and for free.
To implement a pay card program, you have to find a provider, which can be your existing payroll service or bank for convenience. 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.
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.
Payroll Card Providers
Newer vendors focused solely on pay cards can provide employers with unique pay card options for employees. Some examples are Global Cash Card, rapid! PayCard, FlexWage Payroll Card, and Sole. Often your payroll software can be set up to direct electronic payments to these third-party pay card providers in the same way you set up direct deposit.
In addition to working with a pay card company, 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.
Pay Card Providers
|Pay Card Providers||Best For|
|Dedicated Pay Card Provider||Restaurants that need to pay out regular paychecks and tips|
|Payroll Service||Businesses needing services to help pay employees and payroll taxes|
|Banks & Credit Unions||Employers with business bank accounts at institutions that offer pay cards|
|Credit Card Providers||Providing financial management resources to employees in addition to paying them|
|PEOs||Companies in highly regulated industries (construction) that want to outsource payroll and compliance|
Some of these pay card providers pay interest or offer rewards points while others send text messages to card holders once funds are received. Most cost little or nothing for the employer to set up. However, we recommend FlexWage if you want a card that’s issued the same day it’s requested and protects employees’ funds with a Visa liability insurance policy.
Payroll Service & Software
Most online payroll service or software companies have an option to provide electronic payments such as direct deposit or pay cards. Many are able to issue employees a pay card directly or by working with a third-party pay card provider.
Payroll software streamlines your entire payroll process by allowing you to input hours, wages, and employee information. Its processes allow you to print checks or provide electronic payments with a one-time setup. Some offer unlimited payroll runs, and others have sophisticated HR features, like self-onboarding and access to compliance experts.
Banks & Credit Unions
Because pay cards are similar to debit and credit cards, banks (like Chase and U.S. Bank) and credit unions offer pay cards as part of their suite of business banking services. Some even integrate with payroll service providers. However, be aware that there are fees your employees may incur after the first few pay card withdrawals. If you go this route, make sure you look for a pay card option that’s free for your employees to use.
Credit Card Providers
Similar to banks, credit card providers like Visa, Mastercard, and American Express also offer prepaid debit card options that employees can use as pay cards in place of direct deposit. They are usually well established within the industry and provide extra resources (free credit report or score and financial literacy information) that employees can use to better manage their finances.
Professional Employer Organization
The most hands-off way to provide a pay card payment option to your employees is to work with a PEO that handles most of the employee HR and payroll administration for you. Of course, you wouldn’t partner with a PEO just for a pay card.
A PEO can provide your business with HR services, employee benefits, payroll processing, year-end taxes, and payment options, such as a pay cards. If you’re already using a PEO, or are interested in working with one, asking about their pay card options is a smart step.
If you need help choosing a PEO, a broker like The Huldisch Group can match you with a PEO service based on your location and industry, and help you with your HR, benefits, and payroll needs.
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, ensuring all employees know what a payroll 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:
- 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; 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 in addition to 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 the option to check account history by phone, electronic transaction history covering the last 60 days, 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 or not it can be electronic (direct deposit) is determined by each state. For example, New York and California, shown in white 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 above in green, 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.
Some states prohibit employers from receiving any kind of commission or benefit from their employees’ use of pay cards. Therefore, we highly recommend using a pay card provider—whether PEO, payroll software, bank, or credit card company—familiar with employee payment laws within all states in which your employees work.
Pros of Offering Payroll Cards
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 the pros on offering payroll cards:
Pay Cards Are Easier for Unbanked Employees
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), 7% of households don’t have a bank account and nearly 20% of individuals don’t use one. The FDIC refers to these individuals as unbanked or underbanked.
Here’s what one business owner says:
“We highly encourage all employees who do not have a bank account to take advantage of the pay card service. The primary benefit for them is that their payroll funds are available immediately. The pay cards save them the time (and in some cases cost) of having to cash their checks, as many of them are physically going to their local bank or a check cashing business to do so.”
– Jonathan Marsh, CAEd, Owner of Home Helpers of Bradenton
A Pay Card Saves Time
A pay card is similar to 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. Jonathan Marsh adds:
“We’re saving time by not having to process manual checks. The process of setting up an employee with a pay card is quick and only has to be done once for an individual employee.”
Marsh notes another time-saving benefit:
“The biggest benefit is that pay cards allow for the company to get payroll dollars out of the business bank account immediately upon processing payroll.”
Paper checks can be withdrawn weeks and even months after issuing. 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 Money
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 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.
A Pay Card Helps Prevent Check Fraud
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.
Cons of Offering Payroll Cards
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 a lawsuit. Also, if not careful, employees can rack up hefty fees, such as by withdrawing from non-participating banks.
Here are the cons of offering payroll cards:
Payroll Card Fees
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. Marsh adds:
“The only downside I have seen from using a pay card is for the employee. We signed the company up for the pay card service after being marketed to by a pay card provider, who sold us on all of the free aspects of the service. However, our employees have found that some services related to the use of the pay card do incur fees, such as some ATM withdrawals as well as balance inquiries via phone call.”
Compliance With Payroll Card Regulations
Payroll cards are regulated per federal and some state laws, which means you must educate yourself before making it an option for your employees. In 2017, several McDonald’s franchise owners in Pennsylvania were ordered to pay almost $3 million total to hourly employees who sued over unfair pay card fees; some were charged for using ATMs and making online payments. In order 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 with 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 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.
Educate Your Employees About Pay Cards
If you choose to provide your employees with an option to use a pay card in lieu of direct deposit or a paper check, make sure you spend a few minutes educating them on how to avoid paying service fees. Include topics such as:
- How to use in-network ATMs, bank tellers, or point-of-sale (POS) systems to obtain cash and balance information to avoid paying fees.
- How to store their PIN by memorizing it, and not having it written down or kept anywhere near their pay card.
- Who to contact in case they need a replacement card if theirs is lost or stolen.
Frequently Asked Questions (FAQs) About Payroll Cards
In this article, we discussed what a payroll card is. However, we realize that some questions are asked more frequently than others, and we’ve addressed them here.
What is a payroll card?
A payroll card is a reloadable card that employers use to pay employee wages. They’re good for paying employees who don’t have bank accounts, but can also be used to split funds between the card and a bank account. Employees use the pay cards similar to the way debit cards are used: to withdraw cash from an ATM, make online purchases, and buy within a local store or restaurant.
Is a pay card a debit card?
A pay card functions similar to a debit card in that cardholders can withdraw money and make purchases with it, but it’s not exactly the same. Employees can use their debit cards after funds are deposited into their bank accounts, whether through cash, check, or electronic funds transfer. Pay cards aren’t associated with bank accounts and have their own individual subaccounts.
Where can employees use their pay cards?
All pay cards have different rules, so where they can be used may vary. Typically, employees should be able to use them within department stores or any business with a point-of-sale (POS) system, online, and at ATMs or bank teller stations. It’s important to pay attention to your particular pay card program to avoid unnecessary fees.
Can employers force employees to use pay cards?
No. Per federal law, employers cannot force employees to use pay cards. They must offer at least one alternative wage payment method. This can be direct deposit or paper check; however, state laws vary on whether two electronic payment methods (pay card and direct deposit) are allowed.
Are pay cards legal?
Yes, currently, pay cards are legal in all states. The concept is still fairly new, so it’s a good idea to stay up to date with any regulation changes. All states handle pay cards differently, so while they are legal, employers may have to abide by stricter rules, depending on where they’re operating.
While offering pay cards is a great option for employees without bank accounts, it 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.