Stephen T. Middlebrook
A state court has added a new twist to the long and tortured history of payroll card regulation in New York. Employers who pay workers in the state via payroll cards, along with the banks and program managers that administer those programs, need to be aware that the rules are changing. A recent court decision “annulled” an administrative ruling that had revoked a New York Department of Labor (NYDOL) regulation that had authorized, subject to a number of restrictions, the payment of wages to payroll cards. Confused? You should be. New York has managed to turn the regulation of a fairly simple financial product into a giant mess.
Payroll cards, a type of prepaid debit card, are offered by employers to their employees who don’t have bank accounts. The cards enable employers to pay their workers electronically instead of by check. Employees avoid the hassle and cost of check cashers (up to 2.07% in New York) and are able to access their funds at banks, merchants, and ATMs. The cards are issued by banks and insured by the FDIC.
Federal regulations provide for consumer protections, including comprehensive disclosures, error resolution, and protection from liability for unauthorized transactions. In addition to the federal regulations, many states have updated their wage and hour laws specifically to authorize the payment of wages via payroll cards. States usually place some additional restrictions on the product, typically requiring that employees be able to access all of their wages in cash without a fee.
New York first tried to update its laws in 2007 to confirm that workers may be paid on payroll cards, but the legislature was unable to agree on the details. In 2010, the NYDOL issued an opinion letter that concluded payroll cards were permissible under the existing statutes. Lawmakers got involved again in 2011, introducing but not enacting another bill authorizing payroll cards. Legislators tried again in 2013 and 2014. In 2015 five different payroll card bills were introduced. None passed.
Despite lawmakers’ ongoing efforts to set policy in this area, in May 2015, the NYDOL issued a proposed rule addressing payroll cards. This rulemaking had a number of problems and so a few months later NYDOL issued a revised proposal. The new version placed a number of requirements and restrictions on how payroll cards could operate which caused a group of state senators to complain that NYDOL had overstepped its authority and was, in fact, attempting to regulate the business of banking. NYDOL ignored those concerns and published its rule in final form on September 7, 2016, with an effective date of March 7, 2017.
Shortly after the final regulation was published, Global Cash Card, a payroll card provider with a number of clients in New York, petitioned the New York Industrial Appeals Board (IAB) to review the new payroll card rules. The IAB concluded that the NYDOL had, in fact, exceeded its rulemaking authority and consequently the IAB revoked the regulation. NYDOL appealed that decision to state court and last month a judge concluded the IAB was wrong and annulled its decision. Exactly what this development means for employers and their employees is unclear. NYDOL has not said whether it thinks its September 2016 regulation is now in force. Global Cash has not indicated whether it will appeal. Employers can’t be sure their payroll card programs are legal. It’s a mess.
It’s also a shame. Payroll cards are a good product and provide a number of benefits to employees who choose to use them. They should be subject to appropriate regulations, and luckily those rules already exist. At the federal level, the Consumer Financial Protection Bureau has issued a 450 page regulation that covers just prepaid cards, including payroll cards. It creates a comprehensive framework for consumer protection. Unfortunately, the NYDOL rules conflict with the federal rules, requiring payroll card providers to create unique policies and procedures for New York cardholders that are different from those followed everywhere else.
At the state level, dozens of jurisdictions have enacted statutes that, taken together, create a generally recognized set of standards for payroll cards. The NYDOL could have followed that example, but instead drafted a rule that diverges from existing models, often in ways that are potentially harmful to workers. For example, after an employee signs up for a payroll card, New York prohibits the employer from paying the employee on that card for 7 business days. Depending on payday schedules, that means an employee who has indicated she wants to be paid by payroll card may be forced under the NYDOL rules to receive her first wages by some other method. New York’s decision to override an employee’s choice of payment method is simply perplexing.
Let’s hope the confusion spurred by this court decision motivates the state legislature to fix this problem with a simple, straightforward bill authorizing the payment of wages to payroll cards and overriding the NYDOL regulations. In the meantime, banks and program managers that administer payroll card programs need to review their offerings in light of the new rules. Employers in New York must also take action since many of the compliance obligations under the regulations – like figuring out how to implement the silly 7-day waiting period – will fall to them.