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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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August 24, 2015

Payroll Cards at Interstate Speed

State lines happen fast in New England, which is where I call home. In this part of the country, it's not uncommon for people living in one state to commute for employment to a neighboring state. One could pay property tax enjoying the motto "Live free or die" (New Hampshire) while paying income tax to the Bay State (Massachusetts). Employees may not take much notice of state employment law, but employers almost certainly do. I'm thinking that minimum wage, tax rates, and corporation law would be key factors for an employer to consider, but do payroll card laws also fit into the evaluation?

Payroll cards are prepaid cards onto which an employer loads wages. They offer an alternative to paychecks or direct deposits, and are subject to a different sort of regulation. Outside of a federal law prohibiting an employer from mandating the exclusive use of a payroll card, states are generally free to develop their own legislation governing payroll cards. In Maine, for example, employers can offer payroll cards if they give their employees free access to full pay. Connecticut goes one step further, requiring employers to provide certain disclosures and prohibiting overdrafts and certain fees. Massachusetts does not have any law for or against payroll cards. Somewhere in the middle is Vermont, which allows payroll cards with certain disclosures as long as employees receive three free transactions monthly. Proposed New York legislation would go so far as to require employees to sign a written consent form—printed with a large, 12-point font—to be retained for six years following the cessation of the employment relationship.

And that's only in my home of New England. Out of 50 possibilities, I've mentioned only fragments of only five state laws. Outside of this area, payroll-card-related legislation is being introduced or pending in 12 states.

Regulation E has covered payroll cards since 2006. Regulation E includes (i) protection to employees so they do not have to receive wages via electronic funds transfers with a particular institution; (ii) access to statements, balances, and transaction histories; (iii) clear and conspicuous disclosures; and (iv) error resolution and limited liability. In January 2016, we expect the final version of the Consumer Financial Protection Bureau's Rule on Prepaid to be published.

Because payroll cards are already covered under Regulation E, only two significant issues are applicable in the pending rule. First, credit and overdraft services, while not prohibited, will be subject to compulsory use provisions and Regulation Z's definitions of credit and periodic statement requirements. Second, disclosures will carry a bold print warning, "You do not have to accept this payroll card. Ask your employer about other ways to get your wages."

What federal regulation doesn't touch is the type and amount of fees assessed on payroll cards. Regulation E provides only that fees are disclosed. Certain industry stakeholders such as National Branded Prepaid Card Association, Consumer Action, MasterCard, and the Center for Financial Services Innovation have worked to develop industry standards. Simply speaking, most agree that cardholders should have access to full wages each pay period without cost and that they should be able to perform basic functions without incurring unreasonable fees.

Best practices give the industry the ability to fill gaps and stay nimble to changing technology, fraud schemes, and consumer needs. The CFPB even says in their proposed rules, "Employees may not always be aware of the ways in which they may receive their wages, because States may have differing and evolving requirements." Does state-by-state regulation ultimately fill the gaps needed, especially in a system that crosses state lines so often?

And in case you didn't know it, National Payroll Card Week starts September 7, a day that also happens to be Labor Day.

Photo of Jessica J. Trundley By Jessica J. Trundley, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed