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The way workers are paid is changing, as electronic forms of payment are increasingly replacing cash and checks. For a large swath of moderately to highly paid workers who have access to bank accounts, the technological transformation from paper checks to direct deposit has mostly brought benefits. But for low-paid workers, who tend to have less access to the mainstream financial system, the transition to electronic payments is more complicated.

Payroll cards—an electronic form of workplace compensation that is a type of prepaid debit card—can provide unbanked individuals with increased access to the financial system, as well as the benefits of safety, convenience, faster payments, and ease of use that come with it. However, the emergence of payroll cards and similar products that may be developed in the future carries risks as well. Fees associated with these products may extract wealth from the very workers who can afford it least.

Unfortunately, consumer protections relating to how workers are paid have not fully caught up to changing payment practices. While elements of federal workplace and coFnsumer protection laws apply to payroll cards, there are glaring gaps that leave workers exposed to junk fees, such as those incurred by some workers for merely checking their account balances at ATMs. Only a handful of states—most notably, Connecticut,¹ Hawaii,² Illinois,³ New York,⁴ and Pennsylvania⁵—go significantly above federal requirements by banning certain kinds of junk fees; ensuring workers can access their funds several times each pay period without charge; and providing other protections. Still, most states, as well as the federal government, have a long way to go to meaningfully protect consumers from existing electronic payroll practices. Moreover, unless they change quickly, states are likely to fall even further behind as payment practices continue to evolve.

This report explains how workers are currently paid, highlights data showing an increasing use of payroll cards, describes the types of workers most likely to use payroll cards, and outlines the benefits and risks of this payment option. In addition, it reviews how the federal Fair Labor Standards Act and Electronic Fund Transfer Act provide workers with only limited protections and highlights the growing body of state regulations that have emerged to prevent the worst abuses. Finally, the report offers policy recommendations for federal, state, and local policymakers to make sure that workers are adequately protected and are not separated from their wages.

Notably, the policies recommended in this report include:

• Collecting better data about how workers get paid, the level of payment choice they receive at work, and the fees they may incur
• Improving protections for consumers by banning junk fees, prohibiting overdraft and other credit features, requiring deposit insurance, and ensuring better access to worker funds
• Requiring federal, state, and local governments to use best practices for payroll cards when paying their own workers and contractors
• Improving enforcement of payroll card laws to ensure workers receive the protections they are afforded by law

Several of the report’s recommended policy changes can be accomplished through executive action at the state and federal level, though some reforms will require legislation. While the policy recommendations in this report focus on payroll cards specifically, the principles underlying those recommendations are universal for any form of electronic payment.

The advent of payroll cards is the most recent innovation in how workers are paid, but it will not be the final one. As new technology and payment methods continue to evolve, policymakers must remain vigilant to any developments that threaten to separate workers from their wages. Workers should have a choice in how they are paid, and their hard-earned wages should not be eroded by a dizzying array of fees—no matter the form of payment.

How workers are paid

The method by which workers are paid has undergone a substantial evolution. Employees are increasingly paid through electronic means—namely, direct deposit to a bank account or through a payroll card program—instead of by cash or check. According to the National Automated Clearing House Association (NACHA), in 1986, 8 percent of workers were paid through direct deposit.⁶ In 2000, that number jumped to more than 50 percent; and by 2015, it stood at 82 percent.⁷ This trend has mirrored the broader movement toward electronic payments across the U.S. economy. As recently as 2000, check payments for goods and services outnumbered electronic transactions in terms of noncash payments.⁸ By 2015, however, card payments and other electronic payments drastically outnumbered check transactions—by a factor of six.⁹ This trend toward electronic payments will only continue to increase.

While a sizable majority of employees have their wages deposited into their checking or savings accounts, a growing number of workers are receiving wages on payroll cards. Payroll cards are a type of prepaid debit card that in many ways function like a bank account. Every pay period, the employer deposits the employee’s wages—either full or, in some cases, a specified portion—directly onto the card. The employee can then use the card for point-of-sale transactions in stores; cash withdrawals and balance inquiries at ATMs or banks; and online bill pay, just as a consumer would use any other general purpose prepaid card or bank account. The employee’s funds are held in an account at an issuing financial institution, in which they usually, but not always, receive the benefit of deposit insurance from the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Payroll card programs vary from employer to employer, with differing fee structures and additional services attached to the card.

Estimates suggest that the prevalence of payroll cards has grown substantially in the past decade and is likely to continue growing at a rapid rate as employers move away from cash and checks. In 2010, according to an industry estimate from payments consulting firm Aite Group, there were 3.1 million active payroll cards across the country, with $20.9 billion loaded onto those active cards.¹⁰ In 2017, both numbers doubled: There were an estimated 5.9 million active cards with $42 billion in load value.¹¹ By 2022, those figures are expected to jump to 8.4 million and $60 billion, respectively.¹² These figures far surpass the estimated 2.2 million workers who will be paid using paper checks in 2019.¹³

A 2014 Deloitte survey on payroll payment methods also found a meaningful increase in payroll card usage.¹⁴ From 2011 through 2014, payroll card usage jumped from 1 percent of U.S. workers to 5 percent, representing an increase from about 1.3 million workers to 7 million workers.¹⁵

It is also important to consider the breakdown of types of workers being paid with these cards. A 2018 study from the Center for Financial Services Innovation (CFSI) found that relative to the population of working Americans, payroll card users tend to be younger, occupy lower-income brackets, and have higher representation from certain communities of color.¹⁶ The demographic, income, and age trends of payroll card users generally line up with the latest data collected by the FDIC on the broader universe of prepaid card users.¹⁷ Publicly available information also points to the retail, manufacturing, and fast-food industries as key sectors that use payroll cards.¹⁸ Given the profile of workers paid using these products, it is not surprising that the cards are prevalent in these industries.

Still, it is important to note that there is a lack of robust public data on payroll card usage and user demographics. While the industry and nonprofit studies and surveys cited above are reasonably designed and executed, the results are not always consistent. Furthermore, there are no holistic government-produced reports specifically focused on this market.¹⁹ The need to close the data gap on these products is discussed in the policy recommendations section of this report.

Payroll card advantages

The growth of payroll card adoption presents clear advantages and risks for both workers with and without bank accounts. The benefits of this payment method differ depending on the level to which the user is already integrated into the traditional financial system. Payroll cards can serve as an important way for workers who are unbanked—those who do not hold basic financial products such as savings and checking accounts—to experience the benefits that come with access to the mainstream financial system. For employers, electronic forms of payment, such as payroll cards, are significantly cheaper to administer than payment by check. And for governments, it is easier to investigate wage theft allegations when private employers use payroll cards than when workers are paid through cash payments.

For unbanked workers, a payroll card may be a much better payment option than cash or checks. Payment in cash can be inconvenient and is more likely to be lost or stolen, compared with an electronic fund transfer onto a payroll card. Payroll cards have procedures to resolve errors and limit customer liability in cases of fraudulent charges and lost or stolen cards. Moreover, with a payroll card, workers do not need to physically pick up their wages from an employer or wait for the mail to arrive if paid by check. Natural disasters, personal or family illnesses, lost checks, or other obligations may disrupt and delay an employee’s ability to receive wages in person or by mail. With payroll cards, funds are directly deposited onto the card on payday, and the employee typically has access to those funds immediately. Payroll card users are able to withdraw cash—either from ATMs or financial institutions—and can use their cards for point-of-sale transactions or for online bill pay. This functionality provides unbanked employees with many of the same benefits that individuals with bank accounts and debit cards enjoy.

In addition to the benefits of safety and convenience, payroll cards can be a significantly cheaper alternative to payment via check for unbanked employees—although there can be risks, which are discussed below. Check-cashing fees for the unbanked can be excessive, draining worker wages. These fees can be as high as 1 to 5 percent of an unbanked worker’s paycheck, depending on the state and the pricing offered by local check-cashing institutions.²⁰ Even assuming moderate fees, an unbanked worker making $20,000 annually could pay $400 or more a year in check-cashing fees.²¹ It is nearly impossible for employees to avoid these fees when they are paid by check and do not have access to an affordable bank account. This type of fee makes the already precarious financial position of low-income workers that much worse. Individuals cannot afford to and should not have to have their wages eroded when they try to simply access those hard-earned dollars. The $400 a year in check-cashing fees comes into focus when considering that, currently, 40 percent of Americans do not have enough savings to cover a $400 emergency expense.²² Check-cashing fees extract wealth from workers who can afford it the least and simply make it more difficult for them to build personal financial stability.

The benefits of payroll cards can extend beyond just the unbanked. Two different surveys suggest that the sizable majority of payroll card users do in fact have checking accounts.²⁹ Direct deposit to a bank account is probably an option for many of these workers, so it is likely that they see benefits in using a payroll card as a complementary financial product. For example, workers—and their families—in this category can use the payroll card as a budgeting tool. Instead of spending money directly out of a checking account, they can preserve funds in their bank account while spending only their wages, or some portion of their wages, in between pay periods. Workers using this strategy, however, are potentially exposed to the myriad fees charged by payroll cards, when they could avoid many of the possible fees by receiving their full wages through direct deposit to their checking account.

There is one area where a payroll card might be cheaper than a checking account. Many payroll card programs do not offer overdraft services. Overdraft services let a user register a negative balance, with the financial institution covering the payment instead of declining a transaction. These fees, which will be discussed in the next section, can be costly, and overdraft is frequently offered through traditional bank accounts. Using a payroll card that does not offer this service can shield workers from high overdraft fees if their alternative is a debit card linked to a checking account with overdraft activated. That said, some payroll card programs do offer overdraft services with high fees, and since 2010, overdraft has not been automatic; workers have the choice to opt into accepting overdraft services and fees in their checking account.

Simply having a bank account does not necessarily mean that a consumer is fully served by the traditional financial system, and therefore, products such as payroll cards can prove useful. Additionally, higher-quality payroll cards may have better mobile functionality or budgeting tools than an employee’s bank account.

That said, the public should be skeptical of the implications of evidence suggesting that a large percentage of payroll card users do have bank accounts. Though it is likely that the functionality, budgeting, and overdraft explanations are indeed reasons for some people with bank accounts to opt for a payroll card over direct deposit, it is also possible that more nefarious reasons are at least partially to blame. Employers might be pushing employees into these products or making it more difficult to opt for direct deposit to an account of their choosing, despite the legal requirements that there be some level of employee choice regarding the method by which they are paid.³⁴ Employees may not feel like they can exercise their right to select alternative payment options.

Payroll card risks

While payroll cards can provide benefits for the unbanked and even those with bank accounts, these products carry meaningful risks associated with their fee structures that can separate workers from their full wages. Nationwide data on the amount of payroll card fees accrued by workers annually is not publicly available—a clear consumer protection data gap that can and should be addressed. Setting aside the lack of national data, several studies and employee lawsuits paint a picture of the potentially severe pitfalls of at least some of the existing payroll cards in use.

Payroll cards can charge a variety of different fees. Workers could be charged for applying for or participating in the payroll card program; for checking their account balance at ATMs; for using customer service features; for maintaining their account; for having a low balance or account inactivity; for making point-of-sale transactions in stores or online; for being issued initial or replacement cards; for overdrafting their account; and for simply closing their account and requesting refund of remaining account funds. The breadth and cost of fees charged by payroll cards varies by payroll card program, but generally, free-checking accounts at a bank or credit union impose fewer so-called junk fees. Workers may also face payroll card fees for additional cash withdrawals beyond the one free withdrawal required by law. Some payroll card programs offer overdraft services or other credit features that enable workers to borrow funds through the card. These services may come with excessive fees and could saddle workers with debt. In some payroll card contracts between employers and financial institutions, employers receive financial incentives or kickbacks in exchange for offering a specific payroll card program that might be riddled with fees.³⁵

For example, in 2013, Natalie Gunshannon, who worked at a Pennsylvania McDonald’s franchise, sued her employer for forcing employees to receive their wages on a payroll card with very high fees. Gunshannon already had an existing credit union account.³⁶

The payroll card had sizable fees for making ATM withdrawals, for paying bills online, for withdrawing cash at a bank, for replacing lost or stolen cards, and even for simply checking the card balance at an ATM.³⁷ Gunshannon argued that these fees quickly added up and took a significant bite out of her and her fellow colleagues’ wages. After favorable judicial rulings for the plaintiffs, the McDonald’s franchise settled the suit for almost $1 million and now offers alternative payment options.³⁸

An investigation into fast-food chain Hardees provides another illustrative case. In 2014, a U.S. Department of Labor investigation found that the Hardees payroll card program cost workers an average of $2.10 a week, or about $110 a year.³⁹ The fees pushed some workers’ pay below minimum wage, a violation of federal law.

In 2016, the Restaurant Opportunities Center United, a nonprofit organization that advocates for better treatment of low-wage restaurant workers, conducted a study on the payroll card experience of Darden Restaurants employees.⁴⁰ Darden owns several well-known restaurant chains across the country, including Olive Garden and LongHorn Steakhouse. Roughly 48 percent of the company’s 140,000 hourly employees are paid through payroll cards.⁴¹ The 2016 study found that 76 percent of Darden employees using payroll cards reported paying ATM fees and that 24 percent reported paying point-of-sale fees. Moreover, 63 percent of employees reported that they were not told about all of the fees associated with the payroll card, and 26 percent reported that they did not have a choice between the payroll card and alternative wage payment methods. Darden employees reported paying fees for ATM use, the replacement of lost or stolen cards, and periods of account inactivity.⁴² Darden denied most of the report’s findings.⁴³

Beyond these individual lawsuits and investigations, some broader studies have been conducted on payroll card fees and practices. In 2012, the Federal Reserve Bank of Philadelphia released a study conducted using hundreds of millions of transactions on 3 million prepaid cards—including payroll cards—issued by Meta Payment Systems.⁴⁴ Based on the transaction analysis, the Philadelphia Fed found that the 20 percent of payroll card users that incurred the highest fees paid an average of $16 per month.⁴⁵ While this may sound like a modest amount to spend, at the federal minimum wage of $7.25 per hour, it would result in more than 24 hours of gross earnings per year going directly to financial fees. Meanwhile, a higher-income worker with a bank account and direct deposit may incur no fees at all.

In 2014, the New York state attorney general’s office initiated a data collection on payroll card programs and published a report on the findings.⁴⁶ Some of the employers who submitted data to the attorney general provided detailed information on the fees incurred by their workers. The information from this set of employers revealed that 70 to 75 percent of the payroll card users incurred a fee of some kind. The report also found that in some of the payroll card programs, the fees averaged as high as $20 a month per worker. Fees were particularly high for programs that charged overdraft fees, amounting to 46 to 63 percent of the fee revenue on some payroll card programs. In addition, the report found that workers were not receiving appropriately detailed and clearly written disclosures on the payroll card programs’ terms and conditions. Similarly, in 2014, the New Economy Project, the New York Public Interest Research Group, and Retail Action Project surveyed hundreds of workers in New York state. Of those surveyed, the 17 percent who were paid on payroll cards noted ATM fees, monthly maintenance fees, point-of-sale fees, declined transaction fees, and inactivity fees as the key fees they had incurred on their payroll cards.⁴⁷

Prior to initiating the prepaid card rulemaking process in 2014, the Consumer Financial Protection Bureau (CFPB) analyzed an array of prepaid card agreements, including those for payroll card programs.⁴⁸ The analysis showed that at least 75 percent of payroll card programs charged a fee for accessing account information through a paper statement and that these fees ranged from $1 to as much of $5 per occurrence. Moreover, at least 12 percent of the payroll card agreements in the CFPB study had negative balance fees, and at least 12 percent of the card programs did not pass deposit insurance through to account funds in order to protect them in case of a bank failure. In 2018, nonprofit financial research institute CFSI released a survey of almost 700 payroll card users.⁴⁹ Of those surveyed, 44 percent had incurred fees using their payroll cards. Within that subset that had incurred fees, 74 percent of the payroll card users reported paying fees at least once a week. Furthermore, 21 percent of those surveyed felt that they did not have a choice when it came to how they were paid.

Other studies that have focused on general use prepaid cards have shed light on the types of fees that are also present on payroll cards. Two studies by the Federal Reserve Bank of Kansas City that were based on NetSpend data confirm that consumers who opt in to overdraft protection pay more each month for their prepaid cards.⁵⁰

Clear, robust, and nationwide data on payroll card fees incurred by workers every year is not publicly available. As discussed in the recommendations section, that must change. The stories of workers who have sued their employers over these practices—in several cases, successfully—as well as the various state, nonprofit, and regulatory surveys conducted, demonstrate the risks posed by high fees. Some of the dollar amounts for the fees may not seem like a lot, but for low-wage workers, they quickly add up. These fees c