Can the CFPB Regulate Payroll Cards?

28 October 2013 Consumer Class Defense Counsel Blog

As credit card issuers have been subjected to increasing restrictions on the interest and fees they can charge consumers, they have found a new and lucrative sector in which to market their debit cards: payroll. The Federal Deposit Insurance Corporation (“FDIC”) has estimated that employers will disperse $60 billion in wages via payroll debit cards in 2014. The lack of federal regulation and permissive state laws have encouraged employers to pay wages by issuing debit cards as a less expensive alternative to issuing paper pay checks.

Payroll cards are usually provided at no charge by the credit card issuers, but carry hefty fees for nearly everything employees do with them. Fees are routinely charged for ATM withdrawals, in-store purchases, exceeding a certain number of transactions, overdrafts, receiving funds by check, and inactivity. These fees can far exceed the cost of maintaining a checking account at a bank. For those employees who have checking accounts, being paid by payroll cards creates more inconvenience and expense than receiving a pay check or the direct deposit of their wages into their checking accounts. However, many low income wage earners do not maintain checking accounts, and actually prefer being paid by payroll cards, because the fees charged are less than those charged by check cashing businesses.

In Pennsylvania, an employee of a McDonald’s franchisee recently commenced a class action suit, claiming that the fees charged by the payroll card she was required to use reduced her wages to potentially bring her pay below the minimum wage, and that she was not being “paid in lawful money” as required by Pennsylvania law.

The practice of requiring employees to be paid by payroll cards has resulted in a recent warning being issued by the Consumer Financial Protection Bureau (“CFPB”) that it intends to investigate and to seek enforcement actions against employers that require the use of payroll cards under certain circumstances (See http://www.consumerfinance.gov/newsroom/cfpb-bulletin-warns-employers-against-exclusive-use-of-payroll-cards). The CFPB also stated that employers must provide employees with certain consumer protections, including: disclosure of any fees charged for use of the cards, access to their account history, limited liability for unauthorized use of the cards, and error resolution rights. The CFPB cited the Electronic Fund Transfer Act and Regulation E as the basis for its jurisdiction to regulate payroll cards. However, whether the CFPB can effectively regulate the use of payroll cards is not yet clear. The laws of at least 25 states explicitly allow wages to be paid by payroll cards.

What is clear is that using payroll cards to pay wages is an option that some low-income wage earners who lack checking accounts prefer, but that other wage earners want to avoid due to the additional costs that reduce their disposable income. As long as employers offer employees other options to obtain their earnings, they should be able to continue to offer payroll cards in those states that permit them, and will be able to reduce their payroll costs. But those employers that choose to mandate the use of payroll cards risk the unwanted attention of the CFPB.

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