Payroll Cards: How They Work, Regulations, and Pros & Cons

A payroll card (pay 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.

Pay cards offer some advantages, specifically that employees don’t have to visit a bank to access their money. If you’re already utilizing payroll software to run your payroll, it’s a good idea to check whether or not they offer them. Some providers will offer pay cards free to customers, while others charge fees for setup, ATM withdrawals, and even inactivity.

How Payroll 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/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.

For more information about payroll card providers and what they offer, check out our payroll card buyers guide. We evaluated many pay card providers and reviewed the top four, including:

Skylight ONE (Netspend): Best overall payroll card for small business
PaychekPLUS! by FSV Payment Systems: Best for budget-conscious companies and those with salaried employees in the fast food, manufacturing, and retail industries
FlexWage: Best for restaurants and retail stores that hire contractual, part-time, and unbanked employees
rapid! PayCard: Best for businesses that require robust pay card fraud prevention tools

In addition to pay card providers, like those mentioned above, some payroll software has the ability to 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.

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 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 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 or not 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.

Showing a graphic of paycard laws by state.

Regulations by state for using a pay card as an electronic payment method. (Data source: rapid! PayCard)

Pro Tip: 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 that’s 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 some of the advantages of 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.

Pay Cards Save Time

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.

Pay Cards Save 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.

Pay Cards Help 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 nonparticipating banks.

Here are some of the disadvantages of offering payroll cards:

Pay 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.

Compliance With Pay 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 The News: 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.

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.

Tip: To mitigate some of these issues, make sure you educate your employees about pay cards. Specifically, cover how to use in-network ATMs, bank tellers, or point-of-sale (POS) systems to obtain cash and balance information without paying fees and who to contact for a replacement card if theirs is lost or stolen. Also, warn them against keeping their pay card PIN written down or stored anywhere near their pay card.

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.