Regulation E, also known as the Electronic Fund Transfer Act (EFTA), is a federal regulation enforced by the Consumer Financial Protection Bureau (CFPB) that outlines consumer protections for electronic fund transfers (EFTs), including payroll cards. Payroll cards are essentially prepaid cards linked to an account that employers can use to electronically deposit employee wages. While payroll cards offer convenience for both employers and employees, Regulation E ensures that employees have control over how they receive their pay.
What Employers Should Know About Regulation E: Payroll Card Compliance
Regulation E offers a framework to ensure employees have control over how they receive their wages when an employer offers payroll cards. Here’s a deeper dive into key aspects employers should understand:
Employee Choice and Disclosure Requirements:
- Multiple Payment Options: Employers must provide employees with at least one alternative method to receive their wages besides a payroll card. This could be direct deposit to a personal bank account or a paper check. The choice should be presented clearly and employees shouldn’t be pressured towards using payroll cards.
- Pre-Enrollment Disclosures: Before employees can choose a payroll card, employers must furnish them with clear and comprehensive disclosures about the program. This includes:
- Fees: A detailed breakdown of all potential fees associated with the card, including ATM withdrawal fees, monthly maintenance charges, inactivity fees, and balance inquiry fees.
- Transaction Limits: Any limitations on daily or monthly transactions, such as maximum withdrawal amounts or purchase limits.
- Network Availability: Information on the network of ATMs where employees can access their funds without incurring excessive fees.
- Dispute Resolution Process: A clear explanation of the process for resolving errors or disputes with transactions on the payroll card. This should include contact information for the card issuer or program administrator.
- Termination of Service: Procedures for closing the payroll card account and accessing remaining funds upon termination of employment.
- Ongoing Disclosures: Employers should provide employees with periodic updates on any changes to the payroll card program, including fee adjustments or network changes.
Accessibility and Overdraft Protection:
- Reasonable Access to Funds: Employers need to ensure employees have a reasonable way to access their wages on the payroll card. This could involve:
- ATM Network: Providing access to a network of ATMs with a sufficient number of locations and competitive withdrawal fees.
- Alternative Access Methods: Offering additional methods for employees to access their funds, such as online bill pay or point-of-sale debit transactions at participating retailers.
- Overdraft Opt-In: Some payroll cards may offer overdraft protection features, which can help avoid declined transactions but incur additional fees. Regulation E prohibits automatically enrolling employees in overdraft programs. Employers must:
- Clearly Disclose Overdraft Features: Provide clear and concise information about overdraft protection, including potential fees and how it works.
- Obtain Explicit Consent: Employees must be given a clear opportunity to opt-in to overdraft protection before it is activated on their card.
Additional Considerations:
- Recordkeeping: Employers should maintain records demonstrating compliance with Regulation E for a reasonable period, typically several years. This could include copies of disclosures provided to employees and documentation of employee choices regarding payment methods.
- Integration with Payroll Systems: Employers should ensure their payroll systems can accommodate multiple payment methods, including payroll cards and direct deposit to various banks.
- Employee Training: While not mandatory, offering basic training to employees on how to use their payroll cards responsibly can be beneficial. This could cover topics like setting PINs, monitoring transactions, and avoiding potential scams.
Compliance with Regulation E protects both employers and employees. Employers avoid legal risks and ensure a smooth payroll process, while employees retain control over their wages and have access to clear information about the payroll card program.
Avoiding Regulation E Pitfalls: Top 10 Mistakes Employers Make and How to Avoid Them
- Forced Enrollment:
- Mistake: Making payroll cards the only payment option is a violation.
- Solution: Offer at least two choices, including direct deposit or paper checks, alongside payroll cards. Clearly explain the options and emphasize employee freedom to choose.
- Inaccurate Disclosures:
- Mistake: Incomplete or misleading information about fees, transaction limits, ATM networks, and dispute resolution violates Regulation E.
- Solution: Develop clear disclosures outlining all aspects of the program, including fees, limitations, and the dispute resolution process. Regularly review and update them for any program changes.
- Automatic Sign-Up:
- Mistake: Enrolling employees without their consent is a violation.
- Solution: Obtain written consent before enrolling them. Ensure the consent form is clear, outlining program details and opt-out options.
- Limited Access to Funds:
- Mistake: A limited ATM network or high withdrawal fees can hinder access to wages.
- Solution: Partner with a provider offering a broad ATM network with competitive fees. Consider additional access methods like online bill pay or point-of-sale debit transactions.
- Default Overdraft Protection:
- Mistake: Automatically enrolling employees in overdraft protection programs violates Regulation E.
- Solution: Provide clear information about overdraft protection, including fees and risks. Allow employees to explicitly opt-in if they choose.
- Misleading Marketing:
- Mistake: Promoting payroll cards with deceptive information about fees or benefits can be a violation.
- Solution: Ensure all marketing materials are accurate and transparent regarding program details. Avoid exaggerations or omitting crucial information about fees and limitations.
- Outdated Information:
- Mistake: Outdated employee contact information can hinder communication and raise data security concerns.
- Solution: Establish a system for collecting and maintaining current employee contact information. Encourage employees to update their information promptly.
- Ignoring Employee Disputes:
- Mistake: Failing to establish a clear process for resolving employee disputes regarding transactions can lead to frustration and potential legal action.
- Solution: Develop a clear and accessible dispute resolution process. Include a dedicated contact person or department to address employee concerns about transactions or fees. Investigate disputes promptly and fairly.
- Lack of Employee Training:
- Mistake: Employees may not understand how to use payroll cards effectively or be aware of potential risks.
- Solution: Offer basic training on responsible payroll card use. This could cover setting PINs, monitoring transactions, avoiding suspicious activity, and understanding fee structures. Consider collaborating with the payroll card provider to develop tailored training materials.
- Unvetted Third-Party Vendor:
- Mistake: Choosing a non-compliant payroll card provider can put the employer at risk.
- Solution: Conduct thorough due diligence before selecting a provider. Ensure they adhere to Regulation E and prioritize employee protection.
CFPB Enforcement Actions for Regulation E Violations
The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing Regulation E, which safeguards employee rights regarding electronic fund transfers, including payroll cards. When employers violate Regulation E, the CFPB can take various enforcement actions to protect consumers and ensure compliance.
Here’s a breakdown of potential CFPB enforcement actions:
Public Enforcement Actions
- Public Enforcement Actions: The CFPB may take public enforcement actions against employers who violate Regulation E. These actions typically involve:
- Issuing Cease-and-Desist Orders: The CFPB can order employers to stop engaging in unfair or deceptive practices related to payroll cards.
- Imposing Civil Money Penalties: The CFPB can levy fines against employers for Regulation E violations. The severity of the penalty depends on the nature and scope of the violation.
- Requiring Corrective Action Plans: The CFPB may require employers to develop and implement a plan to address the violations and compensate harmed employees. This may involve reimbursing employees for unfair fees, correcting inaccurate disclosures, or offering alternative payment methods.
- Public Enforcement Actions Serve as Deterrence: By making public enforcement actions readily available through press releases and on their website https://www.consumerfinance.gov/enforcement/, the CFPB aims to deter other employers from violating Regulation E.
Non-Public Enforcement Actions
In some cases, the CFPB may choose to resolve Regulation E violations through non-public enforcement actions. These might involve:
- Issuing Supervisory Letters: The CFPB may issue letters to employers outlining identified violations and requiring corrective action without making the enforcement action public.
- Informal Resolutions: The CFPB may work with employers to address violations informally, focusing on resolving the issue and ensuring future compliance.
Choosing the Enforcement Action:
The CFPB’s choice of enforcement action depends on the severity and nature of the violation, the employer’s history of compliance, and the potential for future harm to employees.
By taking a comprehensive approach to enforcement, the CFPB aims to ensure that employers comply with Regulation E and protect employee rights regarding electronic fund transfers, including payroll cards.
Examples of Compliant and Non-Compliant Payroll Card Programs
Here’s a breakdown of scenarios illustrating compliant and non-compliant payroll card programs:
Compliant Payroll Card Program:
- Scenario: ABC Company offers its employees three payment options: direct deposit to a personal bank account, paper checks, and a payroll card through a reputable provider, “EasyPay.” EasyPay provides employees with a clear disclosure document outlining all fees, transaction limits, and ATM network information. Employees are free to choose their preferred payment method without pressure. ABC Company offers basic training to employees on using EasyPay cards responsibly.
- Explanation: This scenario demonstrates compliance with Regulation E. ABC Company offers multiple payment options, provides clear disclosures, and respects employee choice. The training on responsible card use adds an extra layer of employee protection.
Non-Compliant Payroll Card Program:
- Scenario: XYZ Corporation mandates that all new employees receive their wages solely through a payroll card offered by “QuickCash.” QuickCash has a limited ATM network with high withdrawal fees. XYZ Corporation provides minimal information about the program and does not obtain written consent from employees before enrolling them in the QuickCash card.
- Explanation: This scenario showcases several Regulation E violations. XYZ Corporation forces employees to use payroll cards, fails to provide clear disclosures, and lacks employee consent. The limited ATM network and high fees further disadvantage employees.
Another Non-Compliant Scenario:
- Scenario: DEF Manufacturing partners with “FastFunds” for a payroll card program. FastFunds automatically enrolls all employees in overdraft protection with a non-waivable daily fee. DEF Manufacturing receives a kickback from FastFunds for each employee enrolled in overdraft protection.
- Explanation: DEF Manufacturing violates Regulation E by automatically enrolling employees in overdraft protection. The kickback scheme creates a financial incentive for the employer to prioritize profits over employee choice.
Additional Considerations:
- Misleading Marketing: Promoting a payroll card program with claims of “free” when there are hidden fees or limitations violates Regulation E.
- Outdated Disclosures: Failing to update disclosures as program details change, such as fee adjustments, can be non-compliant.
Remember, these are just a few examples. Employers should consult with legal counsel to ensure their payroll card program adheres to Regulation E.
Note: The information provided here is for informational purposes only and should not be construed as legal advice.