What Is a Major Disadvantage of a Payroll Card?

A payroll card is a prepaid, reloadable card that an employer can use to pay an employee’s wages. These cards serve as an alternative to traditional direct deposit into a bank account or receiving a paper check. Wages are loaded onto the card each pay period, allowing employees to access their earnings, make purchases, pay bills, and withdraw cash, much like a standard debit card. This payment method can be particularly useful for individuals who do not have a traditional bank account.

Understanding Common Fees

A major disadvantage of payroll cards stems from the various fees that can significantly diminish an employee’s net earnings. While employers may find payroll cards cost-effective by reducing check printing and distribution expenses, these savings can transfer as costs to the employee. These fees, though seemingly small individually, can accumulate quickly and notably reduce the actual take-home pay.

One common charge is the ATM withdrawal fee, applicable for out-of-network ATMs and sometimes in-network machines after free withdrawals. These fees typically range from $1.50 to $3.50 per transaction, often with an additional ATM operator surcharge. Balance inquiry fees are also common, costing around $0.50 to $1.25 per check at an ATM or for automated customer service calls after initial free attempts.

Inactivity fees may be assessed if the card is not used for a specified period, such as $2 to $5 per month after 60 days. Some cards also impose monthly maintenance fees ($0 to $5) or activation fees. Point-of-sale transaction fees can exist, though many cards offer free purchases. Foreign transaction fees, typically 2% to 3% of the amount, apply when using the card outside the U.S. Customer service fees for speaking with a live agent can also be charged, ranging from $1.00 to $2.50 per call.

Restricted Access and Protections

Beyond direct costs, payroll cards present other limitations affecting an employee’s financial flexibility and security. Daily ATM withdrawal limits restrict access to funds, often capping the amount taken out in a single day and potentially incurring more fees through multiple withdrawals. While payroll cards function like debit cards, they do not contribute to building a credit history.

Consumer protections for payroll cards may not always be as robust or widely understood as those for traditional checking accounts. Not all payroll cards offer FDIC insurance, meaning funds might not be protected if the issuer fails. Additionally, not having a traditional bank account can hinder setting up direct debits or making online payments requiring a bank account number and routing information.

Consumer Safeguards

Federal regulations, primarily Regulation E (Electronic Fund Transfer Act), provide safeguards for payroll card users. This regulation establishes liability limits for unauthorized transactions, typically capping an individual’s responsibility at $50 if reported promptly. Regulation E also outlines error resolution procedures, requiring card issuers to investigate and resolve reported discrepancies.

Employers are legally obligated to offer at least one alternative payment method, such as direct deposit or a paper check, preventing them from solely mandating payroll card use. Many state laws provide additional protections, including requirements for free access to wages, limits on fees, or prohibitions against employers passing on payroll processing costs. These state-specific rules ensure employees can access their earnings without excessive charges.