Payroll cards common in U.S., rare in Canada

Cards not well known here, but they’re facing increased scrutiny south of the border
By Sheila Brawn
|Canadian Payroll Reporter|Last Updated: 04/08/2014

Paying employees with payroll cards has received widespread attention in the United States recently, but in Canada the cards are still not widely known or used.

Payroll cards, like direct deposit, are a way to pay employees. Employers load an employee’s pay onto a card instead of depositing it in the employee’s bank account or giving the employee a cheque. The employee can use the card like a debit card to make purchases or withdraw amounts using an ATM.

The cards offer a way for employers to save money by reducing the use of paper cheques and make it possible to pay employees who cannot have direct deposit because they do not have a bank account. Employers in the U.S. have been using the cards for some time but, in the last year, the cards have come under increased scrutiny after some employee complaints.

Last summer, a former employee at a McDonald’s franchise in Pennsylvania filed a lawsuit claiming the company required her to be paid through a payroll card that charged fees, such as for ATM withdrawals and checking the card balance. Last fall, the Consumer Financial Protection Bureau issued a bulletin reminding employers in the U.S. they cannot require employees to be paid with payroll cards.

"Employees must have options when it comes to how they receive their wages," bureau director Richard Cordray said in the bulletin.

This year, legislatures in Hawaii, New Hampshire and Wisconsin are taking steps to regulate the use of the cards. In January, legislators in Hawaii introduced a bill that initially would have banned payroll cards in the state. Politicians have since amended the bill to permit the cards under certain conditions.

The bills in all three states are making their way through the legislative process. While the bills differ, they would all put similar controls on payroll cards. These include the following: ensuring employees can chose whether they want to be paid with a payroll card; giving employees a minimum number of free withdrawals per pay period; making sure employees can access their card balance without charge; and allowing employees to switch to another payment method (this is already allowed in New Hampshire, but the amendments would prohibit charging employees for changing).

The American Payroll Association (APA) is concerned some of the proposals would discourage employers from using the cards. In a submission to the New Hampshire legislature in January, the APA said the current rules are sufficient and there is no need to prohibit employers from charging any fees.

"At a time when free chequing accounts are becoming significantly less common, (the bill) would require employers who want to offer payroll cards to provide their employees with a number of free banking services. This is not required for any other method of wage payment and is likely cost prohibitive."

The APA says the cards are a good option for paying workers who do not have a bank account or have limited access to traditional banking services. "Without payroll cards, underserved employees often are forced to rely on expensive alternative financial services, such as cheque cashers, to access their wages."

The APA, along with the National Consumer Law Center, has published guidelines that it encourages employers to follow when setting up payroll cards for their employees. The guidelines suggest employers: give employees access to their full wages at least once a pay period without charge (for example, through ATM withdrawals); offer a payroll card that is widely accepted; provide clear information on how to use the cards and any associated fees; and ensure employees have a free way to check their account balance.

In Canada, some employers are paying employees with payroll cards, but it is not widespread. David Gilbert, president of CanaCash Financial Services, which offers various types of prepaid cards with Visa, says payroll cards represent only a small part of his business, but the number of clients is growing. "It’s more new to us (in Canada)," he says.

Gilbert says he has not heard complaints about the cards in Canada, adding that his clients do not force their employees to use them. Instead, they offer the cards as another payment option.

Dave MacKay, president of Ceridian Canada, says although Ceridian uses payroll cards in the U.S., it does not offer them here.

"We don’t do it now in Canada because we survey our customers all the time… and only three per cent had any interest in the payroll card." By comparison, MacKay says Ceridian in the U.S. processes more than $2 billion a year in cards.

The chief difference between the U.S. and Canada is that south of the border there is a much larger number of workers without bank accounts. A 2011 survey by the Federal Deposit Insurance Corporation in the U.S. found 28.3 per cent of Americans either did not have a bank account or had very limited access to a bank.

David McIninch, vice-president of marketing at ADP Canada, says, "over 90 per cent of Canadians have a bank account with the big financial institutions in Canada and what we see is over 90 per cent of our client base is paid via direct deposit."

The types of businesses that may be most interested in payroll cards here are small businesses and those with transient or seasonal workforces, he says.

"In Alberta in the oil patch, there may be an opportunity where a job is complete and they want to pay them on the spot."

While Gilbert agrees that employers with transient workers would find benefit in the cards, he says payroll cards offer advantages to all types of employers. His clients include small employers and large ones. He says they like the cards because of the benefits they offer for reducing paper, lowering costs and dealing with employees.

"The employer has reduced costs because you are only paying for the cards once. You are not paying for cheques over and over," he says. "Also, if you have different things like bonuses or if you have people who are no longer employed (who) are going to get severance, they don’t have to come back to the office. They don’t have to line up."

He adds that the cards also offer benefits for employees even if they have a bank account.

"A lot of people have concerns with regards to using their normal Visa card on the Internet or for travel. In many cases, (the payroll card) gives them the opportunity to use a card that may have less money on it" than a credit card, says Gilbert.

Looking ahead, MacKay says he expects payroll cards will continue to be much less common than direct deposit for paying employees in Canada.

But there could be a future for the cards here if employers think beyond using them solely for payroll.

"Most people think about loading your payroll onto the cards, but they actually have a lot more utility than just payroll. You can put on rewards for people," MacKay says. "There could be expenses that you put on it if you want to preload expenses for somebody going on a trip."