What's a Payroll Card and Should You Use One?

Many business owners have switched from traditional checks to direct deposit payments. According to the American Payroll Association, 93% of people in the U.S. get paid by direct deposit. 

And that makes sense. 

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Businesses get to avoid printing and mailing paper checks, and employees get their salaries instantly. It’s a win-win.

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But what about employees who don’t have a bank account—or who can’t easily access one? You could go old school and send paper checks. Or you could use a payroll card.

What is a Payroll Card?

A payroll card (or pay card) is a prepaid bank card you provide to your employees to pay their salary. Instead of sending checks or direct deposits each pay period, you simply reload the payroll card with their net wages. 

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The payroll card works similarly to a debit card for your employees, but it doesn’t require them to have a checking account. 

What are the Benefits of a Payroll Card?

After direct deposit and traditional checks, a payroll card is the next most common payment method for paying wages.

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And it has certain advantages for you and your unbanked employees.

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So what, exactly, are those advantages?

Employer Benefits

There are a number of benefits for employers when they choose pay cards over checks, including:

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• Reduced costs: According to Commerce Bank, market researchers estimate it costs $10 to issue payment via check. This estimate includes labor costs, plus printing and mailing. Depending on how many checks you need to send, that can add up quickly!
• Automation: You can get your payroll services provider to set up automatic paydays on a prepaid card, which means you don’t have to manually enter wage data or print and mail checks every period. 
• Robust security: With a payroll card, the money goes straight to your employee. Additionally, your employees can freeze a card if they lose it or it gets stolen. This means the money stays safe while your employee waits for a replacement. In contrast, checks can get lost in the mail or damaged before your employee cashes them. 

Employee Benefits

A prepaid card backed by a financial institution doesn’t only benefit employers. It can also be a better option for employees. 

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Some of the benefits for employees include:

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• Convenience: Employees can use pay cards just like debit cards. They can make purchases at online and offline stores, withdraw money from ATMs, and cover bill payments. They can also check the balance of pay cards using an online portal, email, text, or mobile app. These multiple access points make payroll cards an accessible option—particularly for employees that don’t have access to a traditional checking account.
• Instant access to wages: Employees need to deposit or cash a traditional check before they can use that money. And unbanked employees? They have to pay a check-cashing fee to access their paychecks. In contrast, a reloadable card gives employees instant access to their wages, which makes it easier to pay bills on time.
• Rewards: Pay cards, like the card offered through Hourly, give your employees benefits and rewards, like cash back at participating grocery and convenience stores.
• Better financial management: Unlike regular debit cards, most pay cards don’t let employees overdraw from their accounts. This helps them prevent paying overdraft fees for spending money they don’t have.
• Earned wage access: Some pay cards offer employees access to a portion of their earned wages before payday. For example, a card provider might let employees withdraw up to 50% of their next paycheck during the middle of a pay period. This can help employees make ends meet in between paydays and build more financial security.
• Savings accounts: Some card issuers enable cardholders to create savings accounts, which can support employees' financial wellness.

What are the Disadvantages of a Payroll Card?

We’ve seen many pros of using a reloadable card to pay employee salaries. But what about the cons? 

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There are some potential disadvantages to consider before adopting a payroll card program, including:

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• Usage fees: While many pay card providers don’t charge employers, on the employee side, there can be costs associated with the use of the card. Specifically, a cardholder may have to pay a fee for ATM withdrawals, online and offline purchases, and even checking their balance. When choosing a payroll provider, consider all the fees involved for you and your employees. 
• Usage limitations: Typically, you can use a prepaid card wherever a debit card is accepted. However, your employees may have some expenses (such as rent) that accept cash or checks—but not card payments. 

Pay Card Regulations

If you plan to use pay cards, you should be aware of the federal and state regulations that apply.

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So what are those regulations? Let’s dive in. 

Federal Payroll Card Regulations

Fair Labor Standards Act (FLSA) requires you to pay your employees minimum wage or higher.

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But pay card usage fees may lower your employee’s wages below the minimum threshold. So monitor the fees to ensure your employees make more than the minimum wage. 

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For instance, say you pay your employees the federal minimum wage of $7.25 per hour using a pay card with a monthly account maintenance fee of $5.25 for the card user. 

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Technically, that will put their total income below minimum wage, so you’ll need to adjust your pay rate so that employees still receive $7.25 per hour after the monthly fee is deducted.

State Payroll Card Regulations

Some states have additional pay card regulations in place. 

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Examples of such state rules include: 

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• Requirement of employee’s consent to using a reloadable pay card 
• Ability to withdraw the entire wage amount without fees 
• No withdrawal fees or a limited number of no-fee withdrawals 
• Card usage fees must be disclosed to the employee 
• Requirement of one or more alternate forms of payment (most states have this requirement) 

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That said, the rules vary for each state. You can check out state-specific regulations regarding payroll debit cards to see which regulations, if any, apply to you and your business. 

Finding the Best Payment Method for Your Business

Direct deposit is one of the easiest and most commonly used payment methods for employee wages. But if you have team members that don’t have bank accounts, you’ll need an alternative. 

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Before you start printing paper checks, it’s worthwhile to consider using a reloadable card. Payroll cards can streamline your payroll operations and give employees easier access to their wages.

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For more information on a card that works seamlessly with your payroll system, explore Hourly’s FDIC-insured Visa payroll card today.