From: Staffing

While the federal Fair Labor Standards Act (Act) prescribes standards for the basic minimum wage and overtime pay, it does not govern how wages must be paid to employees. Payment of wages is almost exclusively governed by state law.

The use of payroll card accounts by employers for wage payment purposes is one area that employers should be aware of the application of federal law. Payroll card accounts are accounts that are established directly or indirectly through an employer, and to which transfers of the employee’s salary, wages, or other employee compensation are made on a recurring basis.

Use of Payroll Card Accounts

The Electronic Funds Transfer Act (EFTA) covers the electronic transfer of funds to and from consumers’ accounts.  Since 2006, Regulation E, which implements the EFTA, has defined the term account to include a “payroll card account” and covers such accounts “whether… operated or managed by the employer, a third party payroll processor, a depository institution or any other person.” Thus, employees whose wages are deposited onto a payroll card are entitled to the protections of the EFTA generally, and Regulation E’s provisions applicable to payroll cards specifically.

The protections in Regulation E for consumers who receive wages on a payroll card

Mirror those available to consumers who make electronic fund transfers (EFTs) generally with some exceptions. These protections include the following:

• Disclosures: Under Regulation E, payroll card holders are entitled to receive initial disclosures of any fees imposed by the financial institution for EFTs or for the right to make such transfers. The financial institution must also provide to cardholders initial disclosures containing, among other things, details regarding limitations on liability and the types of EFTs they may make with the card.

  Regulation E requires that these disclosures be made at account opening or before the first transfer occurs, although some state laws dictate that certain information be provided before an employee elects to receive wages via payroll card. Regulation E also provides that the disclosures be “clear and readily understandable, in writing, and in a form the consumer may keep.”

• Access to account history: A payroll card issuer must either provide periodic statements as required by Regulation E generally, or alternatively must make available to the consumer:
  • The consumer’s account balance, by telephone;
  • An electronic history, such as through an Internet web site, of the consumer’s account transactions covering at least 60 days preceding the date the consumer electronically accesses the account; and
  • Upon the consumer’s oral or written request, promptly provide a written history of the consumer’s account transactions covering at least 60 days prior to the request. The history of account transactions provided electronically or upon request must set forth the same type of information required on periodic statements under Regulation E generally, including transaction information and the amount of any fees imposed during the 60 day period for EFTs, the right to make EFTs, or account maintenance.
• Limited liability for unauthorized transfers: With limited exceptions regarding the period within which an unauthorized transfer must be reported, Regulation E’s limited liability protections fully apply to payroll cards.
• Error resolution rights: Financial institutions must respond to a consumer’s report of errors regarding a payroll card account if the report is received within 60 days of the consumer either accessing account history or receiving a written account history on which the error appears, whichever is earlier, or within 120 days after the alleged error occurs.

In addition to these protections for holders of payroll cards, 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. 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.

Most states’ laws contain additional restrictions on the manner in which employers may make wages available to their employees, sometimes specifically addressing payment of wages via payroll card, or calling for particular alternatives to payroll cards. The Consumer Financial Protection Bureau (CFPB) notes that the EFTA and Regulation E preempt state laws “relating to” EFTs, among other things, only to the extent of any inconsistency between the state laws and the EFTA/Regulation E. A state law is not considered inconsistent with the EFTA and Regulation E if the state law affords consumers greater protections than afforded by the EFTA and Regulation E.

Finally, the CFPB notes that it has supervisory authority over larger depository institutions engaged in, among other things, providing payroll cards. That authority includes the ability to examine supervised entities’ use of third-party service providers, to assess both the supervised entity’s and service provider’s compliance with federal consumer financial laws, including the EFTA and Regulation E.

The CFPB is also authorized, subject to certain exceptions, to enforce the EFTA and Regulation E against any person subject to the Regulation, including financial institutions and employers. In addition, subject to certain exceptions, the CFPB has enforcement authority over covered persons offering or providing certain consumer financial products or services – including payroll cards – under the Consumer Financial Protection Act.