How a Brewing Fee Controversy Could Threaten Growth of Prepaid Payroll Cards

A controversy over paying lower-wage workers with payroll cards could threaten the growth of one of the fastest-expanding prepaid card markets, observers say.

A lawsuit filed by a former McDonald’s Corp. restaurant worker in Pennsylvania who was paid via payroll card has attracted attention from federal authorities and triggered an investigation by the New York State attorney attorney general. It’s also generated countless news stories over the past couple of weeks. Not surprisingly, the fees on payroll cards came in for considerable bashing.

Payroll cards, however, vary widely in their fees and terms, says Michael O’Toole, senior director of publications, education and government relations for the American Payroll Association (APA), a San Antonio, Texas-based trade group of payroll managers with nearly 21,000 members. He tells Digital Transactions News that the recent dustup could result in state legislation that reduces payment options for both employers and employees. “The problem is that this could create very restrictive reactions by legislators on pay cards, which we don’t think would be a good thing to happen.”

“Payroll cards are going to get a black eye out of this … unfairly,” adds Ben Jackson, a senior analyst at research firm Mercator Advisory Group Inc., Maynard, Mass.

Mercator estimates dollars loaded onto U.S. payroll cards could hit $35 billion by the end of this year, up 15% from $30.4 billion in 2012. Last year’s volume was up nearly 15% from an estimated load volume of $26.5 billion in 2011, which was an increase of 25% from $21.2 billion in 2010.

Despite the growth, payroll cards still aren’t very common. O’Toole estimates that only 1% to 2% of employers offer them, though the percentage of employees receiving their pay via card is somewhat higher because some big companies use them. In fact, New York Attorney General Eric T. Schneiderman has requested information from more than 20 companies, including Wal-Mart, Home Depot, Walgreen’s, and Darden Restaurants, about their use of payroll cards, according to press reports.

Meanwhile, the U.S. attorney’s office in central Pennsylvania has asked the U.S. Department of Labor to check for possible violations of labor laws involving payroll cards. “No one wants to be seen as not protecting consumers,” says Jackson.

The tide of payroll card publicity started in late June when a woman who briefly worked at a franchised McDonald’s location in Shavertown, Pa., near Scranton, sued the owners, a couple who also operate 15 other area McDonald’s stores. The woman claimed that the mandatory use of an allegedly fee-laden payroll card from JPMorgan Chase & Co. to receive her pay violated state law. About 150 current and former McDonald’s workers have joined the class-action lawsuit, the woman’s attorney told the Scranton Times-Tribune.

The McDonald’s franchise said that fees could be avoided if employees used the card properly. But last week, the owners said they would add direct deposit and paper-check payment options, the Times-Tribune reported.

Only about half of the 50 states regulate payroll cards, a far newer payment option than direct deposit or checks, says O’Toole, an attorney. “The technology has grown faster than the law has,” he says.

While payroll laws vary from state to state, the general theme in all of them is that “employees have the right to get all their pay without discount, without having to pay to get it,” he says. O’Toole says he is not familiar with the details of the McDonald’s franchise case, but adds that using a payroll card as the only payment option is “probably a violation of Pennsylvania law.”

Properly executed, however, a payroll card program is a good way to distribute wages to employees without bank accounts or to transient populations such as college students working part-time, according to Jackson and O’Toole. Jackson notes in addition to the high fees that lower-wage workers pay at check-cashing stores to cash paper checks, other alternatives such as low-balance checking accounts are “often full of fees.”

“There’s not one thing that’s perfect for everybody,” Jackson says, adding that he hopes whatever legislation or regulations politicians create as a result of the current controversy are carefully crafted. “You don’t want to see what’s a useful tool that could actually protect some people [get scaled back] because it’s demonized,” he says. “The people they’re supposedly protecting are the ones that could get hurt by painting a broad-brush stroke.”