5 Things You Need to Know About Payroll Cards

One of the latest twists in plastic has nothing to do with celebrities, shopping sprees or rewards programs.

Payroll cards are exactly what they sound like. Employers put wages onto a reloadable card instead of cutting a paper check or making a direct deposit to an employee's bank account. The employee can spend the money straight from the card or withdraw cash from certain banks and ATMs.

Most payroll cards don't require an employee to have a bank account. But that means employers, not employees, control the selection of the card -- and its accompanying menu of fees.

In 2012, U.S. employers loaded $34.1 billion onto payroll cards, according to Madeline Aufseeser, a senior analyst at the Aite Group. In 2013, the amount will climb to $42.8 billion, the company's research predicts.

If your employer offers payroll cards, here are five things it pays to know:

1. You can (usually) access your salary for free. Most states have laws on the books that require employees to be able to access all of their salary for free at least once every pay period, says Ben Jackson, a senior analyst at Mercator Advisory Group.

How that happens can depend on a number of factors, including the particular payroll card, its issuer and the state where you live, he says. In short, too many variables for generalities.

In some cases, it could amount to one free ATM withdrawal every pay period. In others, it might mean one no-cost withdrawal from a bank that offers cards in the same card network (think Visa or MasterCard), says Jackson.

When you investigate your payment options, ask: If I decide to use this card, how do I get my money without paying a fee?

2. Payroll card or no payroll card, your banking habits have a price tag. With or without a banking account, you're likely to need the services banks provide, and they have costs. If you have a checking account, there are costs to maintain it. If you have a paper check and cash it at the check-cashing store, that costs money, too. "The first question people should ask is 'What are my needs? What do I need to be able to do?'" says Jackson. Then, he says, stack up what you pay now against the proposed costs of the employer's payroll card.

If you're considering a payroll card solely because you don't have a bank account, you have choices there, too, says Joe Ridout, consumer services manager at Consumer Action.

If your main objection is cost, try a credit union. They often have fewer and lower fees, he says. Find one at ASmarterChoice.org. If you can't get a bank account because you've been blacklisted, look for one of the "second chance" account options now offered at some banks and credit unions, Ridout says.

3. What does this payroll card charge? If you aren't handed terms and conditions with the card, go online or call the card issuer to get a copy, Jackson says, and call for an explanation of anything that isn't clear.

Users may see fees that have become the norm for other types of plastic, such as charges for using out-of-network ATMs. Some issuers cap the number of free in-network ATM visits users are allowed. A few payroll card providers are charging for actions that are often free with debit cards, credit cards or bank accounts, according to consumer experts. Some examples:

Check balance fees: "We're seeing those fees a lot," says Lauren Saunders, managing attorney at the National Consumer Law Center. These are "common and unfortunate," she says, adding, "You should never be charged for finding out the balance on your account." What users need to know: Often, the issuer will have at least one free method for checking the balance (text, online, automated call, etc.), she says. Find out what it is.
Overdraft fees: Some issuers "offer what they call 'balance protection' or 'overdraft protection,' to let transactions go through when there isn't enough money in the account to cover them," says Saunders, who's seen fees of $25 per incident.What users need to know: You have to opt in to those services. Don't.
Denied transaction fees: Some cards charge a fee if there isn't enough money to cover a transaction. What users need to know: How to check your balance for free. "It's important to know your balance before you use the card," Saunders says.
Oddball fees: A few cards charge for actions not normally associated with fees, such as making online purchases, receiving paper statements, getting cash back after a purchase or not using the card for a few months, says Ridout. What users need to know: In what circumstances does the issuer charge a fee? What actions are free?

4. Your employer should offer an alternative. Federal law mandates that employers provide an alternative to payroll cards, says Saunders. State laws vary, but many require paper checks as one option, she says.

The Electronic Funds Transfer Act prohibits employers from requiring employees to get their salary through only one financial institution, she says. Bottom line: In most locations, a boss can't dictate your bank or salary payment method. That means if a company offers payroll cards, it should also offer direct deposit to your bank account or to the reloadable card of your choice, says Michelle Jun, a senior attorney with Consumers Union.

For information on your alternatives, contact your boss, your human resources department or the payroll company, if your employer outsources payroll to another company. It also may be as simple as calling the number on the back of the payroll card.

5. Don't use a payroll card in places you wouldn't use a debit card. When it comes to fraud or theft, payroll cards fall under the same rules that govern debit cards, says Jackson.

If the card is stolen, the Electronic Funds Transfer Act limits your liability to $50 if you report the theft within two days of discovering it, or $500 if you flag it later but within 60 days of receiving your statement.

If someone swipes your card number, but not your card, you're not liable for anything as long as you report the crime within 60 days of getting your statement, according to the act.

The practical side of it: Absent card-issuer policies to the contrary, in cases of theft, fraud or merchant disputes, you're out the money unless and until the dispute is resolved in your favor, says Jackson.

Because of that, many financial experts warn consumers against using debit cards in environments where theft or fraud is possible or in situations where the goods or services are being delivered at a later date. That advice is apt for payroll cards.

Another potential glitch: Some merchants (certain restaurants, gas stations, hotels, etc.), routinely put a "hold " (a temporary freeze which can last days or weeks) on the card for more than the purchase amount.

With a credit card, that hold applies to a line of credit and is virtually invisible. But with debit cards or payroll cards, a hold ties up actual cash.

An employee guide to pay cards

How employee salary advances work