Independent Contractor Compliance Blog

In this increasing paperless world the use of a Pay Card solution for your W-2 employees or 1099 contractors may look pretty good.  However, there are some issues you should consider before traveling down this road.

The California Labor Code only specifies three ways to pay your employees

Current California Law specifies three legal methods of paying employees.

1. Cash (with a pay stub showing gross pay, net pay, deductions and withholdings)
2. Check (with a pay stub showing gross pay, net pay, deductions and withholdings)
3. Direct Deposit (with a pay stub showing gross pay, net pay, deductions and withholdings)

California Labor Code does not allow an employee paid fee to access their wages.

My research did not uncover any specific California law allowing or prohibiting Pay Cards, but it does prohibit any fees, or discounts, that would be charged to the employee to access his/her wages (Section 212 California Labor Code).

In the 2005-2006 California Legislative Session a bill was introduced (AB 822) that would have allowed Pay Cards as legal tender for wages, though it never passed.

I spoke with a high-level prosecutor in the California Attorney General’s Office and he stated he did not think Pay Cards in themselves are illegal, but he would have a problem with a Pay Card that charged a fee, or discount, for the employee to use it, or if it had an expiration date-a date when the employee would no longer have access to the balance remaining on the card.

Other states have allowed Pay Cards

I found three states that have passed laws allowing Pay Cards as legal tender for wages.

• Oregon
• Maryland
• Virginia

All three require that the employee must consent to being paid by this method.

Other issues with Pay Cards

• Most Pay Card companies charge the employer a fee for each Pay Card established.
• Many companies also charge an initial set up fee for establishing the process.
• A Pay Card is not a Bank Card.  The money is not deposited in the employee’s bank account and does not draw interest or entitle the holder to other benefits that some banks offer their account holders.
• The money in the Pay Card does not appear on the employee’s credit report and does not contribute to the credit score if he/she is applying for a loan.
• Banks who administer Pay Cards benefit from Pay Cards with the float, keeping the money without paying interest, and may collect fees for the transactions (illegal in most states if charged to employee, but not if charged to employer).
• What happens to the money if the Pay Card has an expiration date?

What about independent contractors?

There are no prohibitions against paying independent contractors with these instruments, so you can use Pay Cards to pay your IC’s if they agree.

There are some advantages

Using Pay Cards is not completely negative.  There are some advantages to them.

• The payees can receive their pay instantly without the traditional trip to the bank.
• Pay Cards typically may be used anywhere an ATM Card or prepaid Visa or MasterCard debit card can be used.
• Pay Cards can be used in your business for authorized business travel and per diem, reducing paperwork and accounting costs.
• Companies may find issuing Pay Cards less expensive than “cutting” paper checks.

Pay Cards have been around since the 1970′s in some form or another, generally not associated with payroll, but they have become more prominent in the past few years. If your company is thinking of using them, be sure to do your homework and possibly consult with an expert in this area other than the Pay Card company who will benefit from selling you their system. There have been several civil lawsuits filed against employers and banks by employees. These were generally cases where the bank charged a fee to the employees to use the card and were settled in the employee’s favor.