Warning: That payroll tool might not be a safe option

Yes, moving towards a paperless payday is a noble goal. But tread very carefully if you’re using this particular strategy to do it.

Payroll cards are receiving some new scrutiny from the feds these days. And some high-profile employers are finding themselves in hot water over the tool.

Just this week, the Consumer Financial Protection Bureau (CFPB) issued a bulletin warning employers that they cannot require employees accept their pay via the plastic.

If you’re currently using pay cards for employee compensation – or are even thinking about it – here’s what you need to know.

Don’t let convenience interfere with compliance

It’s understandable that more and more of your peers have been embracing payroll cards lately.

As companies switch to an increasingly paperless finance process, pay cards reach those employees either without bank accounts or those who just can’t seem to trust direct deposit.

But the cards come with some unique complications.

First of all, they’re considered consumer accounts subject to Regulation E, which means the Electronic Fund Transfer Act (EFTA) is in play. And that prohibits card use from being mandated as a condition of employment — unlike direct deposit, which in certain states you can require employees to use.

The key here: You can’t force employees to either open an account or accept payroll cards at a financial institution you’ve selected. (In a direct deposit scenario, the employee chooses the bank where his or her finds get deposited.)

To keep yourself covered: You can certainly offer employees the option of a payroll card if you’re trying to steer clear of paper checks on pay day … just as long as they understand they have other choices.

Another troublespot to sidestep

Even if you’ve providing options and not mandating card use, you’re not out of the woods yet.

Another sticky area when it comes to payroll cards: fees. The cards often have fees attached – sometimes pretty steep ones. Which means that potentially employees paid via pay card can have their compensation dropped below minimum wage after folks get dinged with the fees.

And that’s a likely scenario, considering that it’s often your lower wage earners who end up being candidates for the cards, because they’re the most likely to be unbanked.

So not only will that be something your payroll staffers need to keep an eye on, but make sure you disclose all payroll card fees upfront to employees.

Does this new attention mean it’s not worth the hassle of tapping this paperless pay strategy?

Not necessarily.

As long as you and employees go in with eyes open you can still enjoy the benefits without jeopardizing your company’s compliance:

• Treat payroll cards as a complement, not a supplement. You can absolutely offer this pay option to employee, as long as you don’t force it on anyone. But sure there are choices.
• Disclose all key info upfront. Before employees decide to take you up on the pay card option, they should know exactly what they’re getting into as far as fees, what happens when there’s an unauthorized transfer, etc.

Info: To download the new CFPB bulletin, click.