Topic Eight: Direct Deposit and Payroll Cards

Course Manual for Payroll Practice and Management Online Series 2010 All rights reserved

Author: Vicki M. Lambert, CPP Vicki M. Lambert, LLC

Introduction Direct deposit is an application of the system known as Electronic Funds Transfer (EFT). This is a system by which commercial payments are made electronically instead of using paper instruments such as checks or drafts. Direct deposit of an employee's wages is extremely popular among employers and employees alike. Employer save money by eliminating the cost of printing checks and replacing lost checks, and the employee also saves time and money by not having to stand in line to make a bank deposit. In addition, many banks give free checking if the paycheck is direct deposited. More and more employers are establishing direct deposit programs under which the net check is deposited directly into an employee's personal checking or savings ac- count. Some employer programs involve direct deposit only to employee accounts at the financial institution where the employer maintains its payroll account. This is known as an "Intra Bank" option. However, an increasing number of direct deposit programs make use of a nationwide network of automated clearing houses (ACHs) that enables the employer to make payroll deposits into accounts maintained by employees at almost any financial institution in the country. Advantages of Direct Deposit Benefits for the employer include: Cost Savings: According to the National Automated Clearing House Association, an employer may pay 10 to 23 cents less per payment using direct deposit compared to the cost of issuing paychecks Value as an employee benefit: Direct deposit may be perceived as an extra employee benefit, yet is inexpensive to the employer Security: Problems of lost or stolen checks are eliminated Streamlining of payroll functions: Less time is spent on account reconciliation Benefits from the employee perspective include: Convenience: Less trips to the bank and waiting in long lines to deposit paychecks Interest earnings: For employees with interest-bearing accounts, direct deposit puts their pay to work earning interest more quickly than if they had to deposit their paycheck at the bank Availability during absences: Employees out sick or on vacation on payday still have access to their pay as soon as it is de posited Disadvantages of Direct Deposit Despite its many advantages, direct deposit also has a number of disadvantages that employers should consider before implementing a program. Among these disadvantages are: Employers must constantly update the master file of information on direct deposit participants to make sure that terminated employees are not paid in error. This is one reason why companies with high turnover rates may find direct deposit too administratively burdensome.

It is not "paperless". Employers must still process employee authorization forms and prepare the non-negotiable "pay information statements" that employees receive in lieu of their paychecks. Direct deposit transfers cannot be easily reversed when errors are made. The employer loses the "float" on payroll funds--i.e., interest earnings for the period between when a check is issued and when it actually is cleared by the employee's bank. The payroll processing "windows" may be shortened because of the minimum two-day processing time required for a direct deposit. Scheduling for holidays becomes even more complicated because of the shortened processing period. The ODFI charges for direct deposit service. This reduces the savings an employer may expect from developing a direct deposit plan. Depending on the agreement, most ODFIs will charge a nominal set-up or start-up fee, a monthly maintenance or tape fee, and a fee per debit/credit (with a minimum number per month required). In addition, there is a normally a separate schedule of fees for miscellaneous transactions such as returns or stop payments. Some state laws require the employer to absorb bank service charges the employee may incur as a result of the direct deposit program. Direct Deposit—How it Works Electronic Funds Transfers use a special set of computer generated records recorded on a magnetic tape or transmitted electronically to transfer funds between accounts. A paperless entry, like a check, orders financial institutions to make payment of a specific dollar amount. The direct deposit process begins when an employee authorizes the employer to credit the employee’s bank account each payday. Under a direct deposit program, an employer must collect account numbers for employees' personal savings or checking accounts, as well as "bank Transit" numbers for the employees' financial institutions. The process begins two days prior to the actual payday. On that day, the employer sends the direct deposit file or tape to the employer's bank that maintains its payroll account. The employer may have the choice of delivering the payroll data on a magnetic computer tape, a computer disk, or by a direct telephone transmission to the bank's computer. This bank is called the "originating depository financial institution" or ODFI. The ODFI sets a cut-off time by which the employer must submit its direct deposit file; for instance, by 2 pm, two business days prior to the effective date of the payroll. For example, if the employer’s payday is Friday, the employer’s bank will need the payroll data no later than Wednesday afternoon. This bank extracts any entries for its own accounts that employees have there and set it aside (warehoused) for payday. It then sends the remaining information to the regional "Automated Clearing House" (ACH). It does this by preparing the remaining entries to be transmitted to a regional ACH by assigning a special 14-digit tracing number to each transaction. The first eight digits consist of the ODFI's own transit routing number, while the last six digits are assigned in an ascending sequence. The remaining transactions are then transmitted to a regional ACH.

On the second day, the entries are processed across the ACH network to each employee's financial institution. A regional ACH will route entries either directly to an employee's financial institution or to another ACH, in cases where the employee's financial institution is located in a different region. The key to this process is the use of standardized American Bankers Association transit routing numbers. This is the "address" of each financial institution. By the third day, the payday or payroll effective date, the entries have arrived at the employee's financial institution (called the Receiving Depository Financial Institution or RDFI) and are posted to the employees' accounts. On payday, the employee receives an information statement instead of a paycheck. Some financial institutions, for their own convenience, credit the funds into accounts when the advance notice is received on the day before payday, even though the bank itself has not been credited. Other banks use a computerized accounting process that is called "memo posting". This process provides notice to tellers and automated teller machines (ATMs) that the direct deposit is in a customer's account even though it technically won't be entered to the account until late payday afternoon. By using memo post, a bank is able to delay crediting accounts until they themselves have received the funds. The bank's customers enjoy free access to their funds all day during payday without having to wait for the bank's accounting system to update balance information (post) at the end of the business day. The Regulations Direct deposit programs are subject to several sets of rules and statutes. At the federal level the Federal Reserve Board Regulation E (Title 12, Code of Federal Regulations, Part 205) generally sets forth the consumer protection rights and requirements that apply to electronic funds transfer. Additionally, direct deposit plans are subject to two requirements imposed by the Electronic Funds Transfer Act (P.L. 95-630; 15 USC 1693e, 1693k). These provisions are: Section 907: Employers must have advance written consent to transfer funds from an employee's account. In other words, to take back a deposit made in error. Section 913: An employer may not require an employee to establish an account for receipt of electronic funds transfer at any particular financial institution as a condition of employment. Most states have adopted rules or positions concerning the electronic transfer of payroll funds directly to an employee accounts. A number of states have included their rules concerning direct deposit directly into their labor codes, others maintain an official position as a guideline, and some state governments have no law or regulation. Most states have adopted their direct deposit of wages regulations using these guidelines: Generally the employee must voluntarily consent to direct deposit, usually in writing, and must designate the financial institution. Some exceptions to this include:

Arkansas allows employers to pay by direct deposit without written authorization but the employee can then request to opt out in writing. Iowa allows employers to require employees participate in direct deposit programs as a condition of employment but there are conditions and one of those conditions is that the employee must choose the financial institution and there can be no fees. Kentucky permits employers to require direct deposit so long as the employee has the ability to withdraw the entire net pay without having to pay a fee to the financial institution. Louisiana has no state laws or regulations regarding direct deposit. According to the Louisiana Department of Labor, direct deposit is allowed and employers can make direct deposit mandatory if employees are not subject to deposit-related bank fees and are able to choose the financial institution to which deposits will be made. Minnesota allows direct deposit unless the employee gives a written objection to the employer. Missouri does not address the issue of direct deposit. This is usually interpreted as prohibited. South Carolina requires that the financial institution be located within the state and that the employee is entitled to at least one withdrawal for each deposit free of any service charges. Tennessee has no state laws or regulations regarding direct deposit. According to a Tennessee Attorney General's Opinion Letter, direct deposit is permitted and employers can make it mandatory. Employees must be free to choose the financial institutions into which wages will be deposited. Texas allows that employers can elect to pay wages by direct deposit to employees who maintain bank accounts. Employers establishing direct deposit systems must (1) notify each affected employee of the implementation of the system in writing at least 60 days before the system is scheduled to become operational and (2) obtain from each affected employee any information required by the employee's financial institution for the direct deposit of wages. Washington allows direct deposit to be mandated as long as there is no cost to employees and the funds are available on the established payday. Wisconsin allows mandatory direct deposit if the worker is provided with 100% of his or her wages without incurring any cost such as check fees or service charges on the account. Employers unsure about how state law may affect their direct deposit program may contact the National Automated Clearing House Association (NACHA), or seek legal counsel. Administrative Tip: California requires that employees must voluntarily authorize direct deposit at the financial institution of choice.

Employee Authorizations An employer must obtain an employee's written authorization before direct deposit of the employee's paycheck can begin. The authorization agreement should also give the employer permission not only to credit the account, but to debit the employee's account as well. This is necessary for the payroll department to be able to call-back or reverse a deposit made in error. The employer must keep a copy of the authorization on file for at least two years following revocation by the employee or the employee's termination. The employer, upon request, must present a copy of an employee's authorization to an ODFI or RDFI. While the banks that receive direct deposits retain this right, in practice, this is rarely, if ever, done. It is essential to validate the bank transit and account numbers provided by employees to avoid problems setting up the direct deposit. Therefore, employees should be asked to submit a bank voided check (for checking accounts) or a deposit slip (for savings accounts) with their direct deposit authorization. The ACH system recommends voided checks in lieu of deposit slips for checking accounts to insure the proper account numbers are recorded. The bank transit and account numbers needed to prepare entries for direct deposit transactions usually are encoded in "machine readable ink" beginning at the lower left hand comer of the check or deposit slip. The first group of up to nine digits is the bank transit number. It is usually separated from the other numbers by a colon. The account number is the second group of digits. The third and final group of digits is the check sequence number, which is unnecessary for setting up a direct deposit file and can be ignored.

Employers should be careful not to accidentally combine the check sequence number with the employee's account number, as this could result in the rejection of a transaction when it enters the ACH network.

Another potential problem in the authorization stage is obtaining account information for deposits to credit union accounts and money market and other accounts sponsored by investment firms. The account information on the checks and deposit slips for such accounts are more than likely to be invalid for ACH transactions. If an employee wishes to arrange direct deposit to this type of account, you should instruct them to contact their credit union or investment company for the transit and account number that will be valid for ACH transactions. This is a common occurrence and most credit unions and investment firms often will have special direct deposit information forms prepared for employees to submit to their employer. Direct deposits to an employer credit union is not a problem since they usually are handled outside the ACH network. Creating and Maintaining the Direct Deposit Files To create the information needed for the processing of direct deposits, the employer must add the information from the employees' direct deposit authorization forms to a special "master file" maintained on your payroll system. Accuracy is critical and data should be audited carefully. The master file serves as the basis for the file of direct deposit "entries" the employer submits each pay period to their financial institution. To ensure that the entries are not erroneous, the master file must be updated each payroll to reflect employee terminations and any other changes in bank transit or account numbers due to bank mergers and acquisitions. The payroll department must generally rely on employees to report changes in bank information. Several days prior to payday, the employer uses the payroll system to "down load" data from the masterfile and generate a file of entries for direct deposit transactions. This direct deposit file must conform to specifications established by the National Automated Clearing House Association (NACHA) so that it can be transmitted through the ACH network. Most payroll software will format a file according to the NACHA specifications automatically. However, the employer may contact the originating depository financial institution or NACHA for detailed information about file specifications. Information on how to contact NACHA is included at the end of this chapter. If the employer is a first time user of the direct deposit program, ODFI may require that the employer submits a file of test data to ensure that the file is properly formatted and compatible with the financial institution's processing systems. After the ODFI has approved the employer's test file, the employer may initiate the pre-notification process, which is discussed on the next page. Optional Pre-Notification Process "Pre-notification" is a process by which the accuracy of transaction data (e.g., the employee name, bank transit number, account number, etc.) may be tested before actual dollar transactions take place. If an employer chooses to use this process, the employer will need to prepare a special "pre-note entry" for each new direct deposit authorization received from employees. The pre-notification record (also referred to as a “pre-note”) must be transmitted at least 10 to 15 business days in advance of the first actual dollar transaction. However, since no other method

exists for verifying your data on the master file with the information on ACH's files, it is always strongly recommended that pre-notification be done. Pre-notification entries are included in the batch of other direct deposit entries you send to your ODFI, and basically contain the same data fields as other direct deposit entries except that the pre-note entry authorizes a transaction of "zero dollars and cents". Pre-note entries that cannot be processed by an ACH or RFDI, are generally returned to the employer within six banking days. When the pre-notification record is processed successfully (i.e., where it is not returned within six banking days), the employer simply updates the files of direct deposit transactions to authorize deposit of actual dollar amounts on subsequent paydays. However, where a pre-notification record is returned because it cannot be processed, the employer should: 1. Verify that data entry errors were not made in adding the information to the master file 2. If no data entry errors were made, enlist the employee to verify the accuracy of the information provided on his or her direct deposit authorization form After any invalid information has been corrected, the file is resubmitted for pre-notification. Employers should note that pre-notification is not a completely fool-proof system - sometimes invalid pre-notes may not be returned on a timely basis. So the payroll department should never assume that a pre-note was accepted until it has been verified physically. If an employer chooses to pre-note, new pre-note entries must be issued whenever any of the following items change: The employee's account number The receiving institution's transit routing numbers The employer's identification number New pre-notes must be issued at least six banking days prior to sending the first actual dollar transactions under the new account, transit, or identification number. Employers should note that changes to bank transit routing numbers frequently arise as a result of bank mergers and acquisitions. This process generally takes one to two payroll periods to complete. Emergency Procedures Procedures exist to resolve the usual range of payroll concerns in the electronic environment. The most pressing concern most payroll departments have is how to recover a payroll check issued in error or for an incorrect amount. Whatever the reason for wanting to recover the payroll item, the method of recovery will usually depend on the timing of the notice to the originating financial institution. If the problem is discovered before the financial institution has transmitted the employer’s payroll to the ACH system, the employer has the greatest and most control over the payroll

items. A phone call to the employer’s bank requesting that they delete any problem items is simple and straightforward. In fact, the ACH Operating Rules make it easier to correct errors in duplicate payments, payments not intended to be credited to designated receivers (e.g., payments made to employees or to terminated employees), or payments issued in the wrong amounts. If a mistake is made, companies can now simply generate a “single-entry reversal” through the ACH network within five banking days from the settlement date of the original erroneous entry. As a standard practice, the financial institution will ask to confirm the deletions in writing. They, of course, will execute verbal instructions immediately. Employers should have a prepared standard form to use for all deletions as part of payroll procedures. Complete procedures for recalling an item should be confirmed with the employer’s bank when the program is first established. If this is not done, the employer should discuss these procedures with the bank and add them to payroll procedures. If the problem is discovered after the employer’s payroll items have been released into the ACH system, but before they have posted to the employee's account, the employer should relay the information to the employer’s financial institution as soon as possible, and it, in turn, will contact the receiving institution and request that the item be returned. Again, written confirmation will be requested by both financial institutions. The receiving financial institution will often set the payroll item aside awaiting the written confirmation from the requesting financial institution. In both scenarios, the banks should accept faxes as proof of written request. In some cases, email may be used as well. If the problem is discovered after the payroll item is posted to the receiving account, a problem may exist because legal ownership of the funds in question has changed. Recovery of the funds is now more difficult. This recovery is known as "reversal" and must be specifically preauthorized by the owner of the account. This is why it is important that the original employee authorization form contain a statement for allowing a debit of the account in case of error in postings. Although retrieving items can be done, employers must expect varying and sometimes lengthy delays in the return process. Returns are usually converted to paper and returned back through the banking system as exception items. In the best case scenario, a return may be credited to the employer’s corporate account within a few days. But, delays of two to three weeks are not uncommon. The employer’s financial institution should be following through on the employer’s behalf in prompting and following the timely return of items.

Resolving Late Deposit Issues It is not uncommon for mix-ups or miscommunications to occur when employees cannot access their funds on payday. The lack of access may be due to a delay in posting the funds to the ATM system the employee is using or it may be more complicated such as the employee has changed banks or accounts and failed to notify the payroll department. Regardless of the reason, the first thing the employee generally does when he or she cannot access their funds is to contact payroll. Since the situation could be caused by something on the company side of the direct deposit equation, it is important that payroll handle this type of situation promptly. Failure to act could lead to non-compliance issues if the employee was not properly paid. When this situation does occur, there are several steps the payroll department can and should take to handle the matter. However, before beginning this process, it is wise to call the employee’s bank to determine if it is just a matter of late posting or possibly an internal problem at that branch or bank. If this is the case, then the employee must resolve the issue with the bank directly and there is nothing more that payroll can do. However, if this is not the case then the following steps should be taken: 1. The department needs to verify whether or not the employee has made changes to his or her direct deposit information in the payroll department within the last three payrolls. If the employee has made changes, this could result in the direct deposit being misapplied or not processed. Perhaps the pre-note has not been processed but funds were sent. Research will determine where the deposit went and whether or not a manual check will have to be issued. 2. If no changes have been submitted to the department, then the next step is to verify if the employee has made any changes to his or her bank or bank account without notifying the payroll department. If there have been changes, this could and probably would result in a mis-posting of the direct deposit. In this case, the employee will have to either deal with the bank directly to have the funds deposited into the appropriate account. Of if the bank has rejected the funds, then a manual check will have to be issued. This matter will have to be researched to determine where the monies have been sent. 3. If steps 1 and 2 do not apply, then the routing number and account number should be verified against the employee’s masterfile and the direct deposit report to see if an error has occurred. If no errors are found and the report states that the funds were directly correctly, then proceed to the next step. 4. If the information was found to be correct, then the department needs to verify with the ODFI that the funds were processed and sent to the employee’s bank correctly. The ODFI will need to research its records to determine when and how the funds were processed. 5. If the ODFI verifies that the funds were processed correctly and should have been received by the employee’s bank, then the employee will need to call his or her bank and, armed with the information from the ODFI, have the bank research its records to locate the deposit.

Stopping a Direct Deposit If an employee needs to change bank account numbers within the same bank or switch to a new bank, he or she should stop the current direct deposit and then set up a new direct deposit using the new information. Although not actually required by NACHA, it is the cleanest and safest way for payroll to handle employee changes to their direct deposit. A stop direct deposit form should be created for the employee to use for this situation. Stopping a direct deposit also will need to be done for any employee who is terminating. Although the employee should not receive a paycheck after his or her termination date, actually stopping the direct deposit set up on the employee’s masterfile within the payroll system will ensure that accidental payments are not processed. Administrative Tip: It is recommended that final checks be issued on paper for all terminating employees to ensure that the direct deposit feature has been turned off. Federal Bank Holidays Banking holidays will affect the employer’s direct deposit program. When a payday falls on a federal bank holiday, company policy in compliance with applicable state wage payment laws will decide when employees will be paid. If the policy dictates that payment will be made prior to the normal payday (most common choice among employers), then the ACH processing will have to begin the appropriate number of days earlier to allow for the processing schedule discussed earlier. The following is the ACH holiday schedule: New Year’s Day January 1 Martin Luther King Jr.’s Birthday Third Monday in January President’s Day Third Monday in February Memorial Day Last Monday in May Independence Day July 4 Labor Day First Monday in September Columbus Day Second Monday in October Veteran’s Day November 11 Thanksgiving Day Fourth Thursday in November Christmas Day December 25 If New Year’s Day, Independence Day, Veteran’s Day, or Christmas fall on a Sunday, then the following Monday will be the holiday. There is no provision for a Friday holiday should any of these holidays fall on a Saturday, or for state holidays that differ from these holidays, even though financial institutions may be closed on those days.

Step By Step Strategies on How to Set Up a Direct Deposit Program Step 1: The first step in setting up a direct deposit program is to do a needs assessment. In other words, will any of the employees sign up for the program? If the employer finds a willingness for enough employees to use the program, then they should go on to step two. Well-conceived employee communications are critical to the successful implementation of a direct deposit program. Although, most employees will immediately recognize the benefits of direct deposit, others may be unfamiliar with or untrusting of the concept of electronic funds transfer and may resist giving up their paper paychecks. Employers may be able to conceive some of these employees to use direct deposit through communications that" de-mystify" the direct deposit process and give testimony to its reliability. Communications should emphasize: Direct deposit offers employees more security than receiving a paper check, since seldom, if ever, do direct deposit transactions go astray; lost, stolen, or destroyed checks are more common. The direct deposit process uses a "prenotification" procedure to double-check account information before any of the employee's pay is actually transferred electronically "Pay envelope stuffers" may be a great method for communicating information about direct deposit. For example, a paycheck stuffer emphasizing the convenience of direct deposit may hit home with some employees as they prepare to rush off to the bank to deposit their pay. Other methods employers have used to communicate their programs include posters, video tapes, and special employee workshops. The employer’s bank may be able to provide the employer with samples of questionnaires, marketing aids, and sign-up forms. Step 2: The employer must now set up the mechanics of the program with their in-house programming department or service bureau and their bank to set the electronic funds transfer in place. After determining whether direct deposit is available through their current payroll system, employers should speak with several financial institutions and look for the direct deposit service that best fits the company's needs. Here are six areas to evaluate your choices of banks: Experience How long has the bank been involved in electronic direct deposit? Does it or the staff have the required expertise to assist in training your staff and implementing a direct deposit program, as well as, processing the files through the ACH? Involvement Does the bank offer to get involved with helping set up the new program? Will staff help market the new benefit to employees? Do they offer samples of forms and promotional literature for the company to use?

Flexibility Can the bank offer the employer choices in tape formats, delivery media, deadlines, reports, etc.? Service Does the bank have a reputation for quality, attention to detail, and service? Sophistication Is the bank keeping pace with industry developments in computerization and software enhancements? Price Are the bank's charges for this service reasonable and competitive with other financial institutions? There are other factors in choosing a bank, and a choice may not be available due to the employer’s relationship with its financial institution. But these factors will help employers make a choice if the option of more than one bank is available. Step 3: With the hardware and software tested and in place, the employer must now get the employees to sign up for the program. This should be done through the employee authorization form, as discussed earlier. Step 4: After receiving the employee authorizations, the employer must now go through the "prenotation" or "pre-note" process as discussed earlier. Step 5: If all employees pre-note with no problems, the employer can begin sending actual deposits through the system. National Automated Clearing House Association (NACHA) The National Automated Clearing House Association (NACHA) is a private organization that establishes the rules for the exchange of commercial electronic payments - corporate, consumer, as well as direct de- posit payments - through a national network of more than 40 automated clearing houses. Employers may contact NACHA for information about: Direct deposit file specification ACH exchange rules Costs and benefits of direct deposit programs NACHA also may be helpful in providing employers with literature that explains the benefits of direct deposit to employees For more information, contact: NACHA 13665 Dulles Technology Drive Suite 300 Herndon, VA 20171

(703) 561.1100 http://nacha.org/

Payroll Card Programs
A pay card is a method of paying the employee by a plastic card that has the value of the net wages. A pay card essentially replaces the typical “paycheck”. The employer can reap benefits by implementing a pay card program. Some of these include:  When combined with a direct deposit program, makes the payment of wages virtually paperless  Benefit for Human Resources to use in recruitment  Cost savings of pay cards, direct deposit and plain paper paystubs as opposed to processing paper check stock  Can reduce or eliminate check fraud  Can reduce or eliminate escheat issues  Reduces or eliminates need of employees to take time from work to cash checks  Reduces or eliminates “lost checks” There are employee benefits as well. These include:  Ease of use  24/7 access to funds via ATM system  Automatic bill pay options may be available  May be able to regain credit worthy status if currently unbanked Using Payroll Cards In Payroll The following information covers the use of pay cards. Clearing Up Some Terms There are many different terms used to describe the payroll debit card. These include pay cards, payroll cards, stored value debit cards, and payroll debit cards. Some cards even go by a trade name issued by the card vendor. But these terms basically mean the same thing: a method of paying the employee by a plastic card that has the value of the net wages. Types Of Cards There are basically two types of cards: host based stored value cards and stored-value cards. In addition, the host-based stored value cards are broken down into two types; branded and unbranded cards. Each of these are described below. Host Based Stored Value Cards The payroll debit card is by definition a host based stored value card. A host based stored value card has the value that is associated with the card stored and authorized centrally on a host computer system versus on the physical card. The card is linked to a virtual account that manages the card’s debits and credits in real time. The debit pay card is linked directly to the electronic deposit of the employee’s net pay.

Branded Cards Branded pay cards are cards that usually carry either a VISA® or MasterCard® logo. The card functions just like a VISA® or MasterCard® debit card and are accepted anywhere a VISA® or MasterCard® is accepted. The card only requires the signature of the cardholder to authorize the purchase of goods or services. A PIN can also be issued that must be used in conjunction with the card in order to perform balance inquiries or withdraw funds at ATMs. The PIN is also an option that can be required when using the card for POS purchases. Some of the advantages of the branded cards include:  Because they carry the VISA® or MasterCard® logo they are accepted everywhere that honors these cards  Very easy for the employee to identify with and can make the implementation of the pay card program by the employer easier due to name recognition Some of the disadvantages of the branded cards include:  The card must be personalized. This can take from seven to ten days to get the card to the employee  Because not all merchants use the automated system, the account can be overdrawn by delayed transactions  The first payroll and the transfer payroll could have problems with logistics in transferring the employee from paper to the card  If the card is lost or stolen, it has to be reissued and must be personalized again Non-Branded Cards The card carries the mark or marks of one or more of the major point of sale (POS) and ATM networks and functions just like a debit or ATM card. The employee uses the card to make purchases or to withdraw funds at participating networks such as STAR®, Pulse®, Cirrus® or Plus®. The card requires a PIN be issued to the employee. This PIN must be used for all transactions. Some of the advantages of the non-branded cards include:  Instant issue of the cards since they are not personalized. Payroll or on site locations can keep them on hand  100% of the transactions are on line so there is no chance of overdrafts  The card is FDIC insured Some of the disadvantages of the non-branded cards include:  Not all merchants have the hardware or software to accept PIN-based debit transactions  Still requires paper processing to start the account Stored Value Cards Stored value cards are similar to the prepaid phone cards or stored gift cards that are popular today. The funds are loaded directly on the card by the employer. The advantage to the card is immediate issuing for the employer, however, if the card is lost or stolen, it cannot be replaced unless the funds are reissued.

Legal Issues Federal: Since payroll cards use similar technology as direct deposit they too are now covered under the Federal Reserve Board regulations. Federal Reserve Board Regulation E applies to payroll cards effective July 1, 2007 under a final rule issued on August 24, 2006. Under these regulations: Employers that hold their own payroll card accounts, or issue payroll cards and agree to provide EFT services to payroll card holders cannot require employees to be paid by payroll card and must provide employees with periodic statements, at least quarterly. The periodic statement must contain:  All transaction information  The account number  Any fees charged to the account  The account balance  The address and phone number for inquiries  The telephone number for pre-authorized transfers Instead of a paper statement employers can provide:  Balance information through a readily available telephone line  An electronic history (such as via the internet) of account transactions covering a period of 60 days preceding the date the employee electronically accesses the account  A written history of the employee’s account transactions at the employee’s oral or written request covering at least a 60-day period prior to the request State: Whenever an employer pays an employee there are legal requirements on the state level that must be met. What these requirements are depends largely on what state is involved. But most of the states are beginning to catch up with the pay card trend and are enacting regulations or giving opinions on the use of payroll cards. Most states permit the use of payroll cards as a method of payment of wages with conditions. These conditions include: Must be voluntary on the employee’s part Employee must be able to withdrawal all funds at least one time on payday without fees or costs Fees after the first full withdrawal must be disclosed in writing Generally follows rules for direct deposit requirements Of course there are exceptions: California: Must be California bank. Cardholder must be given booklet to show all locations of ATMS in the state. Non-California institutions may be used if the company waives rights to extraterritorial service of subpoenas for bank records Florida and Hawaii do not address the issue but do allow direct deposit for employee with permission. Iowa: not authorized by law or regulation

Kansas: employers must conduct training program on the use of the card for employees. Maryland: fees attributed to a payroll card must be disclosed to the employee in writing in at least 12 point font. Michigan: Employers paying wages by payroll debit card to one or more of its employees as of January 1, 2005 may pay wages to any of its employees by payroll debit card without obtaining consent. Missouri: no state statutes address the issue at this time. New Hampshire: not permitted New Jersey: Does not address the issue directly. Ohio: Does not address the issue directly at this time. South Carolina: Requires the employee receive a statement showing all deductions as with a payment made by direct deposit. Vermont: Vermont law, 21 V.S.A. §343 does not permit wages to be paid via debit card at this time. The statute requires that wages be paid in cash or check as defined in the Vermont UCC (Uniform Commercial Code). A debit card does not fit the definition of cash or check as defined by the UCC. West Virginia: Wage and Hour Section, Division of Labor opinion is that payroll debit cards are not an acceptable payroll practice. There are of course other issues that payroll may have to address on the state level in order to pay employees via payroll cards. These issues may include:     Can I make pay cards mandatory? What is considered timely payment in that state and can payroll cards comply? Does the state have any requirements for escheatment that relate to payroll cards? Does the state have a “without discount” requirement when cashing payroll checks or when an employee is paid?  Does the state have paystub requirements that must be met? Most of the regulations on these issues are already in place in most states. However, since payroll debit cards are a new technology, some of these legal issues are still being worked out. The following examines the general requirements for each of these issues and where payroll professionals will need to research to make sure any pay card program is in compliance in each state where it will be implemented. Can I make pay cards mandatory? : Unlike when direct deposit first began, with pay cards payroll professionals have some basis to work from when researching this question and that is the direct deposit requirements themselves that most states have put in place. If the state allows mandatory direct deposit then the current thinking is that it will allow mandatory payroll debit cards. But payroll professionals must remember that there are no court cases or rulings yet in this area.

What is considered timely payment in that state?: Many states have strict windows on the payment of termination pay (such as California which requires immediate payment). If the employer is covered under such state regulations, the pay card program must allow for immediate payments and have this flexibility to keep the employer in compliance. Does the state have any requirements for escheatment? In other words, when using payroll debit cards, what is considered abandonment of wages (escheat) and what is the employer’s responsibility?: This depends on the type of card used. If using the stored value cards, then the responsibility falls on the employer. If using the host based stored value cards, then the responsibility falls on the financial institution. Does the state have a “without discount” requirement when cashing payroll checks or when an employee is paid?: Many states require the payment of wages to be “cash, check, negotiable instrument, payable upon demand, without discount, at some place in the state”. This is where the payroll department must be careful when choosing a pay card program. If the card requires fees for each use by the employee this could be a compliance issue. However, if the card allows the first use after each payroll to be free this may satisfy some states. Payroll must research this carefully before signing with any vendors. Does the state have paystub requirements that must be met?: Many states have requirements that a paystub or statement be issued with each paycheck. Pay Card vendors may offer an electronic monthly statement or paystub. In tough states like California, this would not be in compliance with state regulations. Before trying to go completely paperless when implementing a pay card program, the payroll department needs to verify if electronic statements are allowed or if paper paystubs still need to be issued.

Why Would Employees Prefer A Payroll Debit Card Instead Of Direct Deposit? Most of the employees on direct deposit probably wouldn’t. They have a bank account and like the ease of direct deposit. But since statistics show that as of 1999 only 50% of employees in the U.S. are on direct deposit then the question must be asked: Why aren’t the other 50% doing direct deposit? The answer lies in many different areas, it could be cultural differences, a general distrust of banks, or some employees may not want to maintain a bank account because the fees are too high for the little banking they do. There is also the “unbanked”. These are the employees who, due to circumstances, are now unable to get bank accounts. The pay card program can benefit all these employees as well as those who are on direct deposit. Choosing a Pay Card Vendor After the decision to implement a pay card program has been reached, the time comes to begin the search for a vendor. The following may be helpful in the search for a pay card vendor. Before beginning the search the payroll department should:

 Make sure all the legal issues are resolved and that a list of requirements has been created to ensure that the vendor can meet all demands for your program  Conduct an employee poll or search to see scope of the need for the program. Payroll needs to know if 10 or 1000 employees will be using the system before selecting the vendor  Decide what type of card the company will offer—branded or un-branded etc. Searching for a vendor should include:  If the payroll is already outsourced, start with the current payroll processor. Many service providers are offering this service to their clients  Check with the current bank used by the company  Research pay card vendors on the web  Asking other payroll professionals in local professional organizations for references Before selecting a pay card vendor:  Check fee structure o Employer cost could include the cost of the card, the cost of processing each payroll, the cost of processing one time payments such as terminations and new hires, and the bells and whistles included with the cards such as bill paying o Employee costs could include the transactions at ATM and POS networks and extra services such as monthly statements Check compliance issues. The vendor must be able to comply with all the regulations in all the states where the company is located  Check technical and system requirements to make sure that the payroll system and the vendor are compatible and they can meet the company’s processing needs  Check for training of payroll staff. Will the vendor train the payroll department on the software etc?  Training for the employees? Does the vendor offer training for the employees. Remember some employees still cannot use an ATM or POS machine  Marketing tools. Does the vendor offer marketing tools for the payroll department to distribute to the employees? This is helpful in selling the program Implementing a Pay Card Program After the search for the vendor has been completed, the implementation of the program can begin. The following are some of the factors that the payroll professional will need to consider when implementing the pay card program:  What is the scope of the program? If it involves a large number of employees or numerous geographical locations, the payroll department may want to roll out the program in sections. This should be decided first.  Marketing the program to the employees should begin immediately. No matter how great the vendor and the program, the payroll department must have employees using it.  Training of employees should be available as soon as the marketing begins. The employees will need to know how to access their “cash” on the first try on the first payroll the program is in effect

In conclusion, with technology changing rapidly, the payroll professional must always be open to new and possibly better methods for paying the employees.

Students: There are no assignments for this lesson. The information will be covered on the course final.