B2B Payments

Lawmakers Fuel The Paycard Debate

Payroll cards are expected to wipe out paper checks. Recent research found that this year alone, employers will issue more payroll cards to employees than they will checks. But two recent cases in Pennsylvania and New York reveal a growing divide among employers and workers about the payroll card.

Pennsylvania 

On one side of the debate is Pennsylvania. Reports only weeks ago said that a PA court has ruled the payroll card to be unlawful money, a decision based on decades-old laws that prevent employers from paying their workers in scrip, or money that is essentially worthless. The rules are defined in the state’s Wage Payment and Collection Law (WPCL).

In Siciliano v. Mueller, a former McDonald’s employee sued the owners of several McDonald’s locations for issuing paycards, arguing that they are unlawful and force unfair card fees on employers. Since the filing, reports said the case has become a class action suit.

In June, the Court ruled that payroll cards fall under the category of scrip because they are not “bills and coins” or a check, defined as “an unconditional written order” to “pay certain sum of money on demand.” Under the WPCL, a payroll card can only be turned into “lawful money” through a bank or ATM.

According to reports published by Seyfarth Shaw LLP, the court recognized that while a payroll card is a per se violation of the WPCL, “reasonable minds can differ.” On that basis, the judge certified the case for an appeal to the Pennsylvania Superior Court. There is a chance for the ruling to be overturned, reports said, as Pennsylvania has traditionally applied a broad interpretation to the legal definition of “wages.”

Still, author and Seyfarth associate Jacob Oslick noted that the PA Superior Court could affirm the lower court’s ruling, a move analysts said could have widespread consequences for employers and workers. For example, Oslick mulled that the ruling could apply to other non-monetary forms of compensation for Pennsylvania workers, meaning employers could face a lawsuit for giving employees free gifts.

Analysts said that if the case is affirmed on appeal, plaintiffs will likely argue that they were never actually paid any wages at all and will demand full back wages plus damages — despite having already received a payroll card. Reports said, however, that this result is unlikely, and the court is likely to instead allow the defendants to use the issued payroll cards to offset claimed damages.

“In any event,” Oslick wrote, “Pennsylvania employers should consider this decision carefully in deciding whether to revise existing paycard policies.”

New York

Lawmakers in New York, however, are demonstrating a very different opinion of the p-card. Reports in The New York Times late last month cited officials’ ongoing efforts to curb payroll card fees on the basis that the cards provide a way for underbanked workers to get paid.

Reports said the New York State Department of Labor has proposed new rules that would curb the fees imposed on paycard users at the ATM and require that the cards are linked to at least one ATM network that will not charge a withdrawal fee. The rules would also require employers to add that employees could have the option of getting paid by paper check or direct deposit if they so choose.

The public comment period for the proposals has ended, and reports said proponents of the rules are likely to face ongoing opposition from credit card companies and other industry players. Twice, they have successfully rallied to lead previous efforts that introduced similar rules to fail.

But the Department of Labor’s proposals have public support by New York Attorney General Eric Schneiderman, who released the findings of a study on payroll cards last year. Analysts found that payroll cards “are not subject to minimum balance or creditworthiness requirements, which can be difficult for some workers to fulfill.”

Plus, the reports said, paycards are cost-effective for employers, costing them about $0.35 for a payroll deposit, compared with $2.00 for a paper check. Researchers found that employers that switched to payroll cards saved as much as 65 percent in their payroll costs.

It’s these benefits upon which policymakers have largely based their efforts to secure employers’ ability to use payroll cards but at the financial protection of employers.

A Growing Market

The two recent situations in Pennsylvania and New York come at an especially crucial time for the payroll card market. According to Schneiderman’s report, about 5.8 million employees across the U.S. were issued a payroll card in 2013, and that number is expected to rise to 10.8 million by 2017.

Recently, Aite Group released a new report that found that this year, p-card users will top 7 million, while workers paid in paper checks is expected to drop to 6 million — making it the first year ever that payroll cards would be more prominent than paper checks. By 2019, Aite Group analysts predict 12 million workers will get paid with p-cards and just 2 million will receive checks.

Despite growing prominence, these recent cases suggest that there are some kinks to work out in the payroll card market before they completely eradicate the paper paycheck.

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