Connecticut Payroll Card Rules May Limit Access to Accounts for Unbanked Workers

Adam Rust

The State of Connecticut sets a high bar on any employer who chooses to use a payroll card to pay workers. Not surprisingly, many national payroll card programs will not do business in the Nutmeg State.

Legislation passed in 2016 authorized employers to use a payroll card to pay employees. However, when it did, it created minimum standards for accounts that are a bridge-too-far for some providers. The most significant driver to their objections is the expectation that all employees can make at least three free ATM withdrawals per pay period.

Other stipulations:

• Free replacement cards

• Cards cannot have a linked credit line nor can they charge fees or interest for the first two incidences of an overdraft.

• Cards must allow the worker to withdraw the entire net amount of the paycheck in cash.

• Using a payroll card must be optional and the employee must opt-in to the program with written authorization.

The rule also placed a responsibility on employers to create notices that explain their privileges. If the employer has in the past communicated employment-related messages to workers in more than one language, then the disclosures related to the payroll card must also be made available in each of those languages as well.

Employers enjoyed wins elsewhere in the bill as they were able to secure the right to distribute pay records electronically. With the consent of their employees, businesses can list the number of hours worked, net and gross earnings, and deductions to staff.

Some labor unions expressed their support for the bill. One win for workers is that the law established a rule that wages received on a payroll card could not be garnished to satisfy an employer’s debt obligations.

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Making it a requirement that a worker can withdraw all of his or her paycheck into cash means that the payroll card provider must negotiate an agreement to allow account holders to make withdrawals at tellers. ATMs can distribute funds in varying increments, usually no smaller than in five dollar amounts, but most paychecks involve the disbursement of funds that include only portions of dollars. You cannot withdraw 21 cents at an ATM.

Because the rule stipulates that employees must be able to check their balance 24-7-365 by automated phone system, teller machine, or electronically, having branch access is not enough.

I think it is excellent that Connecticut workers can have free access to their pay. Most states require payroll card companies to give workers at least one free withdrawal. However, Connecticut’s insistence on three withdrawals is an outlier, and given how the economics of payroll cards work, it probably is the reason that few payroll card providers will offer their products in the Nutmeg State.

As most payroll card companies are branchless financial institutions, they have to pay to offer access to free ATM networks. The cost of using those machines three times a pay period is substantial. Moreover, the state bars employers from using a payroll card that charges overdraft fees (with a modest caveat if there are more than two overages in a month). The rule lays out conditions when employees must receive a new replacement card for free.

A payroll card company could easily spend $10 each month on ongoing and marginal expenses. Their only chance under this regulatory regime to make up those costs is through swipes. It could take 15 swipes to get to the point where the payroll card company can begin to make up for its cost of doing business. However, if the card has to make it so easy for workers to drain the cash from their account, the company may be left providing a costly service that produces little or no revenue, resulting in significant losses.

Businesses in Connecticut want to use payroll cards. It is not uncommon that we will receive a call from a Connecticut company, frustrated with the cost and risk of paying workers by check.

The need to find accounts for workers is great. There are millions of unbanked workers in Connecticut. The FDIC’s 2017 report on the unbanked and the underbanked estimated that 5.7 percent of the state’s households were unbanked. The FDIC’s report went on to say that by being unbanked, those households were incurring between $15.4 million and $39.5 million in additional costs.

Connecticut law does not speak to the question of whether or not an employer could mandate that a worker receive pay by direct deposit. The Employment Law Handbook believes that the wording of the law “insinuates” that it would be lawful. State law does mandate that all state employees receive funds by direct deposit unless the employee specifically requests otherwise.

We regularly receive inquiries from businesses in Connecticut that want to find a way to bank their workers. We can honor these requests even when some payroll cards would turn those businesses down because of the state’s restrictive payroll card law. Please reach out to us – we would be happy to answer any questions. Yes, we stand ready to help you find accounts for your workers.

Note: I am not a lawyer and this content should not be taken as legal advice. If you are seeking legal expertise on the subject of deploying a payroll card at your Connecticut business location, I would suggest that you seek the advice of a professional attorney.

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Adam Rust has worked to defend consumers against harmful financial practices since 2005. He has written extensively about overdraft fees, payday lending, credit insurance, student loans, prepaid debit cards, high-cost installment loans, and subprime mortgage lending. The New York Times interviewed him when it reported on the CFPB's rulemaking on prepaid debit cards; subsequently, his research paper framed the debate on consumer protections.

He serves on the Board of the US Faster Payments Council. He is Director of Research at Reinvestment Partners in Durham, North Carolina. He is the author of BankTalk. He is the author of "This is My Home: Challenges and Opportunities of Manufactured Housing" and has testified to Congress on how to redress some of the problems with manufactured housing. See more on his LinkedIn profile.