Payroll Debit Cards On The Rise, And So Are Hidden Fees

payroll debit cardsA McDonald's employee filed a class action lawsuit last week, claiming she was required to receive her wages through a debit card packed with fees. But this is no isolated case. Research shows that more employers are paying workers through debit cards.

According to a 2012 report from the business research firm the Aite Group, $42.8 billion dollars will be loaded onto these cards this year, double what is was in 2010. Employers with seasonal and transient workers, such as in the retail, restaurants, and construction industries, are more likely to use debit payroll cards, in part because their employees are less likely to have a bank account to deposit a paycheck.

On the surface, payroll debit cards are win-win: Companies can reduce the cost of processing payroll and distributing paper checks; and workers without a bank account have easy access to their hard-earned cash, without having to pay the high fees of check-cashing services.

Except many of these debit cards charge fees. Firstly, like regular bank cards, any ATM outside a specific network will charge a couple bucks per visit. But there's often a little something extra too on other transactions.

More:Identify And Eliminate Hidden Fees From Your Bills

There are no figures out there for how many of these debit cards are laden with sneaky fees, and the fees on a given card might change depending on the employer, and its contract with the card-provider.

But according to Michelle Jun, a senior attorney at the Consumers Union: "It's not completely atypical to see these types of cards have high fees, to access money at an ATM in particular."

Michael Cefalo, the attorney for the former McDonald's employee filing suit, says his law office has been inundated with hundreds of phone calls in the last week. "It crosses the border in many industries: fast food, some retail industries, a whole bunch of things," he says. "It's across the board."

Why so popular?
Comdata first developed a payroll card over 20 years ago for truck drivers, who often struggled to pick up paychecks given their days on the road. The practice spread, particularly in industries where workers have no bank account to deposit a check. Statistics show that nearly one in 12 American households doesn't have a bank account, and one in five use money services other than a traditional bank.

For these people, payroll debit cards may be a bargain even with fees, if they add up to less than the cost of non-bank money orders and check-cashing services.

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Who is using the cards? On a Reddit thread about the case, anonymous users mentioned other big brand companies who pay workers with similar cards, including Burger King, Applebee's, GameStop, Charter Cable, and Walmart. Only the latter two responded to requests for comment.
  • Charter Cable's card has no fees, except for withdrawals from out-of-system ATMs and pin-based transactions, according to spokeswoman Anita Lamont.
  • The debit card offered by Walmart, the country's largest employer, gives workers free cash at any Walmart register, but adds an extra fee to ATM withdrawals past a certain monthly limit, according to company spokesman Dan Fogleman (who didn't know the exact amount).
  • Customers of Paychex, an industry leader, incur no fees when they buy items with their card, but pay extra when they withdraw over-the-counter more than five times in a month, according to spokeswoman Laura Saxby Lynch.
  • Comdata's card offers unlimited free over-the-counter withdrawals, but only one free ATM withdrawal per pay period, according to Edwin Benson, Comdata's director of strategic sales. Back in 2009, an anonymous GameStop employee complained that his Comdata card charged him for regular purchases.

As Benson explained: "Our paycard is designed to be completely free to the employer, and virtually free for the employee."

More:3 Ways To Avoid Overdraft Fees

Certainly none of this is as bad as the fees described by Natalie Gunshannon, the 27-year-old who filed suit in Pennsylvania. Her J.P. Morgan Chase payroll card allegedly charged her $1.50 for ATM withdrawals, $5 for over-the-counter cash withdrawals, and $10 for three months of inactivity -- a suckerpunch of fees when you earn just $7.45 an hour. The attorney for the defendants responded that if used properly, the card is completely free.

The crux of the issue, according to the lawsuit, is whether debit card payment qualifies as "lawful money," since wages must be paid "in lawful money of the United States or check" under Pennsylvania law. All the legal issues aren't clear, but Gunshannon's lawsuit raised a big enough alarm for the U.S. attorney's office for the Middle District of Pennsylvania to ask the U.S. Department of Labor to see whether it might violate any federal laws.

"It's international. People have called us from Australia, from England," says Cefalo, her lawyer. "It's got an unusual set of legs, and we don't know where it's going."

Are you paid through a debit card? Do you have any fees? Give us the scoop in the comments.

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