With a growing number of employers using direct deposit to pay their employees instead of paper checks (or even rarer, actual cash!), employers need to be aware of restrictions on the use of debit cards for such payments. Since some employees may not have checking accounts, employers may provide them with a "debit card" – usually issued by a local banking institution – to which the employee's pay is credited on each payroll date. The employee can then use the card like "cash" for any purchases.
The Consumer Financial Protection Bureau (CFPB) recently issued a bulletin (No. 2013-10) reminding employers that they cannot force their employees to receive wages on a payroll card. The bulletin also pointed out other consumer protections that may apply to payroll cards such as fee disclosure, access to account history, limited liability for unauthorized use, and error resolution rights. The CFPB indicated that it had received reports of employees using payroll cards who complained of unexpected fees for using automatic teller machines or checking the balance on their card.
The CFPB pointed out that employees must have "options" when it comes to how they receive their wages. Under the Federal Electronic Fund Transfer Act (EFTA), payroll card users must be provided the following protections:
- The right to receive written disclosure of fees imposed for electronic transfers of funds to and from the cards;
- Access to their account history, either through periodic statements or telephone and internet access to their 60-day account histories;
- Limited liability for unauthorized use of the card; and
- The right to have the financial institution respond to their timely report of an error.
Most states, including Tennessee, also have laws concerning the manner in which employers may pay wages. Some states, including Tennessee, address the use of debit cards for payment of wages.
T.C.A. §50-2-103 (sometimes referred to as the Tennessee Wage Payment Statute), specifically permits payment through the electronic automated transfer of funds as well as credit to a prepaid debit card. T.C.A. § 50-2-103(e)(2) requires that an employer who chooses to compensate its employees using prepaid debit cards must also give employees the choice of being paid by electronic transfer. The employer must explain the system to the employee and provide full written disclosure of any applicable fees associated with the prepaid debit card. If the employee still chooses not to designate an account at a financial institution for the electronic transfer of payroll funds, then the employer may arrange to pay the employee by prepaid debit card. The employer must also ensure that each employee has the ability to make at least one withdrawal or transfer from the prepaid debit card per pay period without cost to the employee for any amount contained on the card.
In an opinion issued in 1986 upholding the payment of wages by direct deposit, the Attorney General referred to the EFTA which prohibits an employer from forcing an employee to become a member of a specific credit union in order to receive payment of wages. That opinion held that an employee can be required to choose from a list of financial institutions selected by the employer.
As more and more employees even in rural areas generally maintain checking accounts in one of their local financial institutions, the problem is less prevalent than it was in previous years, but there are still instances where employees do not have a checking account into which their "pay check" can be deposited directly. In such instances, it is appropriate for the employer to provide the employee with a debit card, but the employee should be given some choice in which institution issues the card, and be provided with the information required under the EFTA.