The problem with payroll cards

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If you don’t receive your paycheck via a payroll debit card, you probably know someone who does — or soon will.

In 2012 alone, businesses loaded $34.1 billion worth of wages onto 4.6 million payroll cards, and that number is expected to grow to 7.1 million cards and $51.5 billion loaded annually by 2014, according to Aite Group, a financial services consulting firm.

Payroll cards are essentially prepaid debit cards that are loaded up by employers every pay period. The cards can make purchases at a point of sale and be used at ATMs to withdraw funds loaded on them.

For businesses, the cards are part of a push to finally get rid of paper payroll checks, which are vulnerable to fraud and costly to print and get into the hands of employees. Businesses have been trying for years to push as many employees as possible into direct deposit. But in order to ditch paper paychecks altogether, banks have to find some way to pay employees who can’t or don’t want to have their paycheck direct-deposited into a checking account.

In an ideal world, loading those funds onto payroll debit cards would be a win-win solution to that problem, says Lauren Saunders, managing attorney at the National Consumer Law Center.

“In general, payroll cards can be a useful way to pay employees who don’t have bank accounts, who can’t have direct deposit,” Saunders says. “For an employee who doesn’t have a bank account, a well-designed payroll card can be a fast, convenient and inexpensive way of getting your money.”

But in practice, the cards can hit workers with a fusillade of fees that substantially cut into their wages, including monthly maintenance fees, point-of-sale fees, ATM fees and even “overdraft” fees. Especially for low-wage workers, it doesn’t take many $1.50 ATM fees and $1 point-of-sale fees to negate an hour of work at the federal minimum wage of $7.25.

If your employer is planning to transition to payroll debit cards or already has, it’s important to understand that using a payroll card can’t be mandatory.

“Employees should always have the choice of direct deposit to their own account, and many states require the choice of a check as well,” Saunders says. “It violates the law to require an employee to use a payroll card.”

In fact, the New York attorney general’s office is investigating a number of large employers, including Time Warner Cable, Darden Restaurants, Walmart and Home Depot for allegedly pushing employees too hard to accept the cards, according to reporting from Bloomberg.

The best choice from a fee standpoint is to have the money direct-deposited into a checking account at a bank or credit union, but for those who elect to go with a payroll card, knowing how and when you’ll be charged is paramount, Saunders says.

“There can be fees to get your balance or fees for calling customer service, and you really need to know what the fees are and how to avoid them,” she says.

Especially for employees looking to make multiple withdrawals per pay period, avoiding those fees may take some ingenuity.

“There are often a number of ways to withdraw cash without a fee, in addition to ATM withdrawals,” she says. “Usually you can go inside a bank to the teller window and withdraw cash. Grocery stores and big-box retailers will often let you get cash back from purchase, although you need to enter your PIN, and there could be a PIN fee.”

Policymakers may eventually step in to make sure workers can get fee-free access to their wages. A group of senators led by Sens. Richard Blumenthal, D-Conn., Chuck Schumer, D-N.Y., and Joe Manchin, D-W.Va., recently sent a letter to the Consumer Financial Protection Bureau and Department of Labor urging action on the issue.

On the bright side, the Federal Reserve ruled in 2007 that payroll cards are covered under Regulation E, which means they get the same legal protections from fraud that traditional debit card holders get. Payroll card providers are also required to provide a free statement of the card’s balance and other information periodically, free of charge, often via email.

What do you think? Would you be OK with receiving your wages by payroll card?

Follow me on Twitter: @ClaesBell.

Senior banking reporter Claes Bell is a co-author of “Future Millionaires’ Guidebook,” an e-book written by Bankrate editors and reporters. It’s available at all the major e-book retailers.