Electronic wage payment offers significant advantages to employers and employees alike. But, there is one major benefit to paying employees electronically using payroll cards: payroll cards are one of the least expensive ways for employees to receive their wages. Using payroll cards makes it easier for you to pay your employees, and they get more take home pay.

The alternative, universal direct deposit has been an elusive goal for franchisees. This is because franchises are common in industries with high concentrations of unbanked or underbanked employees, such as the retail, fast food and hospitality industries.

A 2009 study by the Federal Deposit Insurance Corporation revealed that more than 25% of U.S. households do not have bank accounts or have limited access to traditional banking services (collectively referred to as the "underserved population").[1]

So it is not surprsing that in recent years, the payroll card has gained widespread popularity and acceptance. Because no applications, credit checks or personal bank accounts are required, every employee is eligible to participate. Accordingly, franchisees wishing to increase their direct deposit participation rates, or to eliminate paper paychecks altogether, should seriously consider making payroll cards a part of their electronic wage payment programs.

What Are Payroll Cards?

A payroll card is a reloadable prepaid (i.e., stored value) card issued to an employee through a financial institution on behalf of his or her employer. Each pay day, the payroll card is electronically loaded with the full amount of the employee's net pay. The employee can then use the card to receive cash from an ATM or a bank teller, make purchases both in-person and online, and pay bills.

Payroll cards should be offered along with direct deposit. Under the federal Electronic Funds Transfer Act and its implementing regulation, Regulation E, employees must be able to designate the financial institution into which their wages are deposited.[2] The Board of Governors of the Federal Reserve System has taken the position that giving employees a choice between direct deposit into an account of their choosing and payment on a payroll card satisfies this requirement.[3]

Benefits of Electronic Wage Payment

Electronic wage payment offers numerous benefits to employers and their employees. Employees without bank accounts, who are likely to be the primary users of payroll cards, generally incur high fees when cashing their payroll checks and then incur additional expenses when paying their bills using money orders or traveling to a payment location to pay cash. These costs can be eliminated when employees are paid on a payroll card. Indeed, at least three studies have shown that payroll cards are one of the least expensive ways for employees to receive their wages.[4]

Like employees, employers save money when their workers are paid electronically. The cost of issuing and distributing paper paychecks can be enormous. This is particularly true for franchisees with multiple locations who often rely on the postal service and overnight carriers to deliver paper paychecks. For all employers, electronic wage payment reduces costs associated with check processing, bank reconciliation and replacing lost or stolen paychecks.

In fact, the Electronic Payments Association estimates that employers can save between $2.87 and $3.25 per payment by using direct deposit rather than paper paychecks.[5]

Cost savings are just one of the many benefits of electronic wage payment. Studies have shown that electronic wage payment also helps to financially empower underserved workers. In a recent study conducted by the San Francisco Office of Financial Empowerment and the Corporation for Enterprise Development (CFED), low-income workers reported that payroll cards helped them prioritize their spending, allowed them to shop online, helped them to save money, and even facilitated the transition to a traditional bank account.[6] Similarly, a 2010 study by NACHA revealed that employees who receive their wages electronically (i.e., by direct deposit) tend to pay their bills more regularly,[7] another sign of financial empowerment.

In addition, employees who are paid using a payroll card enjoy increased flexibility and prestige. Today, the vast majority of payroll cards are branded, meaning that they bear the Visa, MasterCard or Discover logo. Branded payroll cards can be used anywhere that the particular brand is accepted. Moreover, all of the benefits offered on debit products by the major payment brands also are available on the brand's payroll cards without cost, including purchase protection, dispute resolution procedures and fraud protection.

Electronic wage payment also helps employers deliver wages to employees in a timely manner, even when the employees are away from the workplace and even when faced with unexpected contingencies. For example, severe weather and natural disasters can cause power outages, road closings and airport shutdowns, all of which can make the timely delivery of paper paychecks difficult if not impossible.

Similarly, payroll cards allow employers to make off-cycle wage payments in real time, thereby easing compliance with strict wage payment statutes requiring immediate payment on termination. Complying with these requirements using paper paychecks can be challenging for franchisees, particularly when the termination is unexpected and/or payroll is processed offsite or out of state.

Convenience to employees and prompt access to wages translates into increased morale and productivity among employees, an important benefit to the franchisee. Finally, electronic wage payment is an attractive option for franchisees who are looking to become more environmentally conscious. According to the Electronic Payments Association, checks use more than 674 million gallons of fuel and add 3.6 million tons of CO2 to the environment each year as they travel through the payment cycle.[8]

State Law Recognition of Electronic Wage Payment

Although direct deposit is lawful in every state, state law treatment of payroll cards is still developing. As recently as 2003, no state had updated its wage payment statutes or regulations to address this beneficial method of wage payment.

However, today, the wage payment statutes and/or regulations in 20 states expressly authorize the use of payroll cards.[9] In the vast majority of the remaining states, the wage and hour enforcement agencies have issued informal enforcement positions permitting the use of payroll cards when specified conditions are met. Indeed, the laws and/or enforcement positions in at least half the states can be interpreted as permitting employers to offer their employees the choice of direct deposit and payroll cards, without also offering a paper paycheck option.[10]

Common Conditions Imposed on Payroll Cards

Although the conditions imposed on the use of payroll cards vary from state to state, most states require that employees have access to their full wages on payday. This means that employees must be able to withdraw or otherwise access their wages at least once each pay period without cost.

Access using an ATM alone is unlikely to satisfy this requirement since most banks limit the total daily amount that may be withdrawn from an ATM and because ATMs only dispense funds in $5, $10 or $20 increments. Accordingly, most programs allow employees to access wages in other ways as well, such as from a bank teller, through the purchase of money orders, and/or through the issuance of convenience checks. Importantly, employees with branded payroll cards can take their cards into any bank that issues that particular brand of debit card and receive their full wages from the bank teller at least once each pay period without charge.

Other conditions that commonly are imposed on the use of payroll cards include employee consent, disclosure of terms and conditions including potential fees, and employee ownership of funds. Given the differing state law requirements, it is imperative that franchisees review applicable legal requirements before implementting an electronic wage payment program

Consumer Protections

In the past couple of years, consumer groups have begun to express concerns about prepaid cards, suggesting that the cards are unregulated and, therefore, that they lack consumer protections. While this may be true of some prepaid products, it is not true with respect to payroll cards.

In addition to being subject to the state wage and hour laws, payroll cards are subject to Federal Reserve Regulation E. Regulation E includes many important consumer protections.

For example, Regulation E limits cardholder liability when a lost or stolen card is used fraudulently so long as the cardholder reports the lost or stolen card within a specified period. It also requires that dispute resolution procedures be available to cardholders and that all terms, conditions and fees be clearly disclosed. In addition, although overdrafts on payroll cards are uncommon, Regulation E prohibits fees for overdrafts without prior consent.

Branded payroll cards provide additional consumer protections in accordance with the established policies of the brand they carry. As mentioned above, these protections include "zero liability" for lost or stolen cards used for unauthorized purchases, purchase protections, and dispute rights.


Electronic wage payment offers numerous benefits to franchisees and their employees. Historically, however, franchisees have had difficulty achieving high participation rates due to the high concentration of underserved workers they employ. Payroll cards offer a unique solution that allows franchisees to bring the benefits of electronic wage payment to all of their employees, even those without bank accounts. In light of the many benefits payroll cards offer both employers and their employees, its time for franchisees to consider including payroll cards in their electronic wage payment programs.

[1] FDIC National Survey of Unbanked and UnderBanked Households (December 2009), available at http://www.fdic.gov/householdsurvey/Full_Report.pdf.

[2] 15 U.S.C. § 1693k; 12 C.F.R. § 205.10(e)(2).

[3]Board of Governors of the Federal Reserve System, Interim Final Rule: Regulation E (Docket No. R-1247), 71 Fed. Register 1473, 1479 (January 10, 2006).

[4] M. Flores, Analysis of Network Branded Pay Cards: Comparative Analysis of Pay Card to Other Payment Options (Bretton Woods, Inc. August 15, 2011); T. Sloane and P. Hewitt, Payroll Cards: 100% Electronic Payments 80% of the Time, Crossing the Market Finish Line (Mercator Advisory Group January 2009); Community Developments, Insight, Payroll Cards: An Innovative Product for Reaching the Unbanked and Underbankd (Comptroller of the Currency, June 2005).

[5] The Electronic Payments Organization, Fast Facts About Direct Deposit, available at http://www.electronicpayments.org/c/fi_ddep_fastfacts.cfm?hp=fi.

[6] E. Fitzgerald and L. Phillips, Financial Empowerment Through Employer Engagement: Migrating a City to a Paperless Payday (CFED and the San Francisco Office of Financial Empowerment, March 2011), available at http://cfed.org/programs/innovation/fitzgerald_white_paper/.

[7] See footnote 5, above.

[8] The Electronic Payments Association, Benefits of Direct Deposit, available at http://www.electronicpayments.org/c/ind_ddep_benefits.cfm?hp=ind.

[9] These states are Arizona, Colorado, Delaware, Florida, Kansas, Maine, Maryland, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, North Dakota, Oklahoma (Attorney General Opinion), Oregon, Tennessee, Utah, Vermont, Virginia, and West Virginia.

[10] See The APA Visa Payroll Card Portal at http://www.americanpayroll.org/Visa-Paycard-Portal/. Franchisees wishing to implement electronic wage payment programs should consult qualified legal counsel to ensure compliance with the applicable legal requirements.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.



Search for Articles

Follow Us