Paycards often are promoted as a way for employers to save money. There are many reasons why employers should consider offering paycards as a compliment to their direct deposit programs; however cost savings is just one of them.

Paycards also allow employers to compensate all of their employees electronically, even employees without bank accounts. As the Mercator Advisory Group noted in a 2009 report, direct deposit gets employers most of the way to 100% electronic wage payment, bit "it will be the payroll card that gets a larger part of the market to the finish line."

Electronic wage payment also eases compliance with state wage and hour laws, and provides employees with access to their net pay in a far safer and more secure format that a paper paycheck. Convenience to employees and prompt access to wages translates into increased morale and productivity.

Electronic wage payment also is good for the environment. In addition to reducing paper usage, employees with electronic pay don't need to drive to the bank on payday and idle their car in the drive-through line.

Many employers even experience an increase in their direct deposit participation when they introduce paycards as a wage payment method.

These are just some of the reasons why a comprehensive electronic wage payment program, offering employees the choice between direct deposit and paycards, presents a win-win solution for employers and their employees. Most employers should consider adopting such a program.

EVOLUTION OF ELECTRONIC WAGE PAYMENT LAW

Direct deposit was introduced in the United States in the 1960's, but did not gain widespread acceptance until the 1990's. Today, direct deposit is recognized as a safe, convenient, and cost effective method of paying employees. According to the electronicpayments.org website, 97% of the people who get paid by direct deposit are satisfied with it.

There is one significant drawback to direct deposit, however. A surprisingly large number of workers are unable to participate either because they do not have a bank account (i.e., they are "unbanked") or they have limited access to banking services (i.e. "underbanked"). A recent study conducted by the Federal Deposit Insurance Corporation (FDIC) found that approximately one in four American households are either "unbanked" or "underbanked" (collectively reffered to as the "underserved" population).

In 2001, Visa USA launched the first branded "payroll card" as a way of bringing the benefits of electronic wage payment to all employees, including the underserved population. A paycard is a prepaid, reloadable card issued by a national or regional bank. Each pay period, funds are transferred from the employer's payroll account to the financial institution issuing the paycard. Employees can then use the paycard to access all their wages through ATM withdrawals, bank teller transactions, or purchases with a cash-back option. Most paycard programs offer additional methods of accessing wages without fees, including money orders, paying bills online, and convenience checks that can be used to cash out the paycard.

Initially, employers were hesitant to use paycards, especially since older wage payment statutes made their legality questionable. The regulatory environment relating to electronic wage payment has changed significantly in the past five years.

So far, 15 states have revised their wage payment statutes and/or regulations to specifically address paycards, and a number of other states are considering doing the same. In addition, virtually every state has addressed the issue at least informally by publishing opinion letters or posting agency enforcement positions.

Paycards are now widely recognized as a lawful method of wage payment. Indeed, in almost half of the states, employers can eliminate paper paychecks altogether by giving employees the choice between receiving their wages by direct deposit or on a paycard.

PAYCARDS EXTEND BENEFITS OF DIRECT DEPOSIT TO UNDER-SERVED WORKERS

Employees without bank accounts and those with limited access to banking services benefit significantly from paycards.

Studies have shown that under-served employees incur large fees when cashing their paychecks. Once the check is negotiated, the employee is left holding his or her entire net pay in cash. Often, they will need to purchase money orders to pay bills or travel to the payment location to pay in cash.

In contrast, paycard programs typically give employees the ability to make at least one withdrawal or transfer each pay period without fees. this means that employees can access all of their wages on payday without cost.

For security reasons, however, many employees choose to leave some of their wages on the card. They can use the card to pay bills, make purchases online, make debit card purchases at stores, or simply use it as a savings device.

ELECTRONIC WAGE PAYMENT BENEFITS ALL EMPLOYEES

All employees benefit from the convenience of electronic wage payment.

Employees who are paid electronically have immediate access to their wages no matter where they are on payday. Indeed, employees can access their wages 24 hours a day at ATM machines across the country and overseas.

Employees no longer need to wait in long lines or travel to the bank on payday. Increased convenience, security, and access to wages translates into improved employee moral and productivity.

ELECTRONIC WAGE PAYMENT MAKES COMPLIANCE EASIER

Federal and state wage and hour laws require employers pay wages on an established payday. In many jurisdictions, penalties may be imposed if the employer fails to comply with this requirement.

Even the best-intentioned employers encounter obstacles that make the timely payment of wages difficult, if not impossible. Many employers rely on the mail or overnight delivery systems to distribute their paper paychecks. These systems can be shut down during dangerous weather, leaving employers scrambling to find a way to provide employees with access to their wages.

Employers also have difficulty distributing wages in a timely manner when employees travel on business or work at remote locations. Prompt delivery of wages is not an issue, however, when wages are paid electronically.

Compliance with final wage payment requirements can also present a challenge, particularly in states that require payment  immediately upon termination. This is because it takes time to process, print, and deliver paper paychecks. In contrast, most paycards can be loaded instantly, allowing employers to deliver final wages promptly and with ease.

ELECTRONIC WAGE PAYMENT PROVIDES INCREASED SECURITY

Employees who are paid electronically enjoy increased safety and security. They no longer need to carry their wages around in cash.

Paycard wages are protected by a pin selected by the employee, and are FDIC insured. Regulation E limits the amount of money that a consumer may lose in the event of certain unauthorized uses of the card. Employees with branded cards are often protected against fraudulent use by zero cardholder liability policies, which have been adopted by Visa, MasterCard, and Discover.

ELECTRONIC WAGE PAYMENT IS ENVIRONMENTALLY FRIENDLY

Electronic wage payment offers employers and employees a way to demonstrate their commitment to the environment. Eliminating paper paychecks saves paper and, therefore, trees. Moreover, in a 2007 study, Dove Consulting reported that paper checks use more that 674 million gallons of fuel and add more that three million tons of carbon dioxide to the environment each year.

COST SAVINGS CAN BE ENORMOUS

The cost savings realized when an employer switches to electronic wage payment cannot be overlooked. Employers who compensate their employees electronically eliminate expenses associated with printing, processing, and distributing paper paychecks. These savings can be substantial. Some employers are able to save hundreds of thousands of dollars each year simply by transitioning to electronic wage payment.

Account reconciliation costs and stop-payment fees for lost or stolen paychecks also are greatly reduced, if not eliminated. Plus, escheatment liability is transferred from the employee to the financial institution.

CONCLUSION

Employers who implement electronic wage payment programs including paycards provide an important benefit to their employees, while enjoying significant cost savings and increased efficiency. With little downside, employers should seriously consider how such a program could benefit their operations.