Understanding How Prepaid Debit Cards as Payroll Works

We’ve spoken before about the ins and outs of prepaid debit cards. They carry both benefits and drawbacks for the everyday consumer. The perks — including convenience and assistance with personal budgeting — need to be weighed against the drawbacks, which include ample fees for a variety of card-based activities.

Prepaid debit cards have recently been thrust into the national spotlight for a whole new reason. Many employers have relied on prepaid debit cards as a form of payroll for some time, but a recent lawsuit against McDonald’s regarding this practice prompted a nationwide discussion about the ethics involved.

In this article, we’ll explain what’s at issue and break down the debate currently underway, including the reason many employers may choose to use prepaid debit cards for payroll and the concerns raised by opponents of the practice.

Prepaid Debit Cards as Payroll

Several major national retailers reportedly use prepaid debit cards in some markets as a form of payroll in lieu of traditional paychecks. The list includes heavy hitters such as Wal-Mart, McDonald’s, Home Depot, and Walgreens. One research firm revealed that in 2012, $34 billion was loaded onto 4.6 million active “payroll cards.”

Some employers give employees multiple options for payment, including a prepaid debit card. For others, prepaid is the only way to go, with no alternative available.

Here’s how it works: instead of issuing a check, these employers simply load the amount of an employee’s paycheck onto a debit card, which is then issued to the employee. These cards are reloadable, so when the next pay period is up, the appropriate amount is added on again.

In the meantime, employees can use these cards to make a wide variety of purchases. The main criticism? Prepaid debit cards are notoriously rife with fees for activities such as balance inquiries, card replacement, ATM withdrawals — even lack of use.

There are a number of reasons why this practice has become commonplace. For one, it saves employers money by negating the need for paper paychecks and stamps. In addition, the ability to reload existing cards may streamline the payroll process.

One report calculates savings at $21,000 per year for a business with 500 employees paid on a weekly basis. It’s worth noting that the practice also funnels significant amounts of money back to Wall Street via fees.

The McDonald’s Lawsuit

One former McDonald’s employee is crying foul about the fast food giant’s choice to make prepaid debit cards the only payment option available for employees. The Pennsylvania woman was so upset about the fees involved with her “paycheck” that she opted to quit her job, hire a lawyer, and sue McDonald’s over the practice earlier this year.

A class-action lawsuit was filed on behalf of the Pennsylvania woman and other employees, alleging “ill-gotten gains contrary to justice, equity, good conscience, and Pennsylvania law.” Her complaint centered on fees such as:

  • $1 for a balance inquiry
  • $1.50 for ATM use
  • $5 for over-the-counter cash withdrawals
  • 75 cents for online bill payment

So far, the lawsuit has prompted change for at least one franchise: the plaintiff’s former employer reportedly made prepaid credit cards “voluntary” after news of the complaint gained traction.

A recent New York Times article dove into the real impact of the prepaid debit card debate, interviewing people whose paychecks are distributed this way. Namely, the practice disproportionately affects low-wage workers, and those fees hit hard. One McDonald’s employee reported earning $7.25 per hour but spending “$40 to $50 a month on fees associated with his…payroll card.” Those small amounts add up, and it’s frustrating for those who watch every penny.

While some companies offer more than one payroll option, The New York Times found that “choice” is “often more in theory than in practice,” and employees are “often automatically enrolled in the payroll card programs and confronted with a pile of paperwork if they want to opt out.”

Low-wage workers aren’t the only ones taking notice and raising their voices in opposition to the practice of prepaid debit cards for payroll. In early July, New York Attorney General Eric Schneiderman launched an investigation into the practice. His office told reporters: “We are concerned about excessive or insufficiently disclosed fees which may unduly reduce employees’ take-home pay,” said a letter from Schneiderman’s office.

The Bottom Line

Regardless of the outcome of Attorney General Schneiderman’s investigation, public opposition to the practice of prepaid debit cards for payroll may force companies to rethink the practice.

If your employer uses prepaid debit cards as payroll, make sure you understand all of your options. Do they offer alternatives? If so, it may be worth looking into — even if there’s a lot of paperwork involved. Read the fine print, ask questions, and ensure you’re making an informed decision.

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