CFPB Pledges To Enforce Consumer Protection Laws Over Mandatory Payroll Cards
For 4.6 million Americans, there is a fee just to access their own paycheck. As of 2012, more than $120 million in payroll card fees are suspected to have been collected, per a Federal Reserve study. These fees can range from — for one provider — $1.75 per ATM withdrawal, $2.95 to request a paper-based statement of charges, $6 to replace a card and even a possible $7 inactivity fee for not using their cards at all, as reported by the New York Times.
In 2006, the Bush administration approved Regulation E to the Electronic Fund Transfer Act, which confirmed consumers’ rights in receiving and transferring funds from a bank account, and in 2009, the Obama administration pushed into legislation the Credit Card Accountability Responsibility and Disclosure Act, which limited the banks’ abilities to impose excessive fines on consumers. Recently, the Consumer Financial Protection Bureau has pledged more scrutiny on non-compliance to these laws.
“Regulation E states clearly that no ‘financial institution or other person’ can mandate that an employee receive direct deposit into an account at a particular institution,” the CFPB said in a bulletin it sent to the nation’s employers. “Said another way, Regulation E prohibits employers from mandating that employees receive wages only on a payroll card of the employer’s choosing.
“Regulation E permits an employer to require direct deposit of wages by electronic means if the employee is allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their wages deposited at a particular institution (designated by the employer) or receiving their wages by another means, such as by check or cash. Thus, an employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means. Permissible alternative wage payment method(s) are governed by state law, but may include direct deposit to an account of the employee’s choosing, a paper check, cash, or other evidence of indebtedness.”
Paying to be paid
In recent months, the idea of imposing extra fees on the wages of employees that are typically mandated to receive their pay by payroll card — minimum wage, low-skilled fast food and retail employees — has been challenged. New York Attorney General Eric Schneiderman is currently investigating businesses such as McDonald’s, Home Depot, Walmart, Walgreens, Time Warner Cable and Darden Restaurants to see if their mandated payroll card programs comply with state law that rightfully earned pay must be paid out “without cost.” Members of Congress are currently calling for an investigation into the practice and consumer advocacy groups are filing reports and lawsuits against businesses engaged in the practice.
The bulk of the complaints in regard to implementation of payroll card programs deal with deceptive practices, such as employers failing to inform employees they have the right to choose a different pay method, misinformation about possible fees and denial of requests to be paid in an alternative manner. With some employers being offered incentives for each employee they sign up for the paycard plan — such as with the New York City Housing Authority, which receives a dollar from CitiBank for every employee it signs up to CitiBank’s payroll card — there is a fear that employees are being illegally herded into high-fee programs unaware.
Despite this, industry groups expect the number of payroll cards to reach 10.8 million by 2017. “Prepaid cards provide value for both employers and employees,” said Madeline Aufseeser, a senior analyst at the Aite Group, a financial research and consulting firm. “It’s significantly cheaper than cutting a check and it also provides added safety and security.”
Aite estimates that an electronic payment costs $2.75 less than cutting a paper check. Aite also feels that payroll cards offer a “value-added benefit” to the majority of the employees that work in jobs that typically offer payroll cards. These employees are typically referred to as “unbanked,” as they are for the most part either incapable of establishing a banking account, unable to afford the fees associated with having a banking account or both. By offering the payroll on a preloaded debit card, Aite argues that the inconveniences associated with cashing a paper check — the long lines, dealing with a bank teller, check-cashing fees, difficulties in replacing a lost check, etc. — can be avoided through the use of a prepaid card.
Businesses love this because prepaid payroll cards take a significant amount of the processing fee out of employee payroll and allow them to list the card as an “employee benefit.” This, in effect, transfers financial responsibility for payroll administration to the employees themselves. The banks love this because it allows them an avenue to collect card fees that is not immediately noticeable to the public at large.
“This is, in some ways, a hidden market. It’s not a card that’s offered to the public, so it doesn’t get scrutinized by the public,” said Lauren Saunders, managing attorney at the National Consumer Law Center. “Employees have no say in negotiating the fees.”
Questions of choice
At the core of this argument is the question of choice. While many payroll card plans allow for one free ATM withdrawal per pay period, any remaining pay on the card becomes immediately subject to the card’s fee structure. As it is virtually impossible to completely withdraw one’s full wages off of a payroll card from an ATM — ATMs only pay out in either $20, $10 or $5 bills — almost every card holder will be subject to at least one fee every pay period, which can total as much as $50 every month. This leads to the net result where minimum wage employees that are forced to use a mandatory payroll card are in effect paid less than minimum wage.
While a check-cashing store or a checking account can also impose excessive fees, these are fees the employee accepted by his or her own volition. The notion of a mandatory payroll card forces employees to consent to a bank fee structure as a condition of employment. “We hear virtually every week from employees who never knew there were other options, and employers certainly don’t disabuse workers of that idea,” said Deyanira Del Rio, an associate director of the Neighborhood Economic Development Advocacy Project.
The CFPB argues that beyond giving employees a choice to request a paper check, if wished, employees must have immediate access to a disclosure of the fees involved in using the payroll card, must have access to their account history, must have limited liability protection for unauthorized use and must have access to an account error resolution process.
Many, however, argue that payroll cards are not necessarily a bad thing. “For unbanked workers, payroll cards can mean no check-cashing fees, greater security without the risk of cash, access to pay despite natural disasters and the ability to make purchases over the Internet and by telephone,” said Saunders.
Ultimately, a payroll card is just a bank product, not unlike any other device. The onus is on the businesses that use them to ensure that their employees are protected. “I don’t think banks want to have the job of being the compliance officer to businesses,” said Terry Maher, general counsel for the Network Branded Prepaid Card Association. “But it’s important that they help their clients understand the regulations out there and help them with the appropriate disclosures.”
At the end of the day, this all amounts to a simple question of fairness. “I know I deserve to get fairly paid for my work,” said Natalie Gunshannon, who is currently suing her former employer, a McDonald’s franchisee, for denying her request to have her pay direct-deposited.
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