A growing number of American workers are confronting a frustrating predicament on payday: to get their wages, they must first pay a fee.
For these largely hourly workers, paper paychecks and even direct deposit have been replaced by prepaid cards issued by their employers. Employees can use these cards, which work like debit cards, at an A.T.M. to withdraw their pay.
But in the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.'s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards.
These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account, according to interviews with consumer lawyers, employees, and state and federal regulators.
"It's pretty bad," he said. "There's a fee for literally everything you do."
Certain transactions with the Chase pay card are free, according to a fee schedule.
Many employees say they have no choice but to use the cards: some companies no longer offer common payroll options like ordinary checks or direct deposit.
At companies where there is a choice, it is often more in theory than in practice, according to interviews with employees, state regulators and consumer advocates. Employees say they are often automatically enrolled in the payroll card programs and confronted with a pile of paperwork if they want to opt out.
"We hear virtually every week from employees who never knew there were other options, and employers certainly don't disabuse workers of that idea," said Deyanira Del Rio, an associate director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.
Taco Bell, Walgreen and Wal-Mart are among the dozens of well-known companies that offer prepaid cards to their workers; the cards are particularly popular with retailers and restaurants. And they are quickly gaining momentum. In 2012, $34 billion was loaded onto 4.6 million active payroll cards, according to the research firm Aite Group. Aite said it expected that to reach $68.9 billion and 10.8 million cards by 2017.
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Companies and card issuers, which include Bank of America, Wells Fargo and Citigroup, say the cards are cheaper and more efficient than checks—a calculator on Visa's Web site estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards. On its Web site, Citigroup trumpets how the cards "guarantee pay on time to all employees."
The largest issuer of payroll cards is NetSpend, based in Austin, Tex. Chuck Harris, the company's president, says it attracts companies by offering convenience to employees and cost savings to employers.
"We built a product that an employer can fairly represent to their employees as having real benefits to them," he said.
Sometimes, though, the incentives for employers to steer workers toward the cards are more explicit. In the case of the New York City Housing Authority, it stands to receive a dollar for every employee it signs up to Citibank's payroll cards, according to a contract reviewed by The New York Times. (Sheila Stainback, a spokeswoman for the agency, noted that it had an annual budget of $3 billion and that roughly 430 employees had signed up for the card.)
For Natalie Gunshannon, 27, another McDonald's worker, the owners of the franchise that she worked for in Dallas, Pa., she says, refused to deposit her pay directly into her checking account at a local credit union, which lets its customers use its A.T.M.'s free. Instead, Ms. Gunshannon said, she was forced to use a payroll card issued by JPMorgan Chase. She has since quit her job at the drive-through window and is suing the franchise owners.
"I know I deserve to get fairly paid for my work," she said.
The franchise owners, Albert and Carol Mueller, said in a statement that they comply with all employment, pay and work laws, and try to provide a positive experience for employees. McDonald's itself, noting that it is not named in the suit, says it lets franchisees determine employment and pay policies.
Some employers and card issuers say that the payroll cards are useful for low-wage workers who do not have bank accounts. They also say that the fees on the cards are usually lower than those associated with check-cashing services, which are often the only other option for people who do not have bank accounts.
"An unbanked employee is likely to be subject to a check-cashing fee when they try to cash a payroll check," said Nina Das, a Citigroup spokeswoman. She said that "someone cashing a payroll check for $500 would end up paying $15 at a 3 percent check-cashing fee."
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This population—people who tend to use few, if any, bank services—is swelling. About 10 million households in the United States do not use a bank at all, up from nine million four years ago, according to estimates from the Federal Deposit Insurance Corporation. And 24 million households that do have a bank account still use expensive financial services like prepaid cards, the agency said.
For banks that are looking to recoup billions of dollars in lost income from a spate of recent limits on debit and credit card fees, issuing payroll cards can be lucrative—the products were largely untouched by recent financial regulations. As a result, some of the nation's largest banks are expanding into the business, banking analysts say.
The lack of regulation in the payroll card market, while alluring for some of the issuers, can potentially leave cardholders swimming in fees. Take the example of inactivity fees that penalize customers for infrequently using their cards. The Federal Reserve has banned such fees for credit and debit cards, but no protections exist on prepaid cards. Cards used by more than two dozen major retailers have inactivity fees of $7 or more, according to a review of agreements.
Some employees can also be hit with $25 overdraft fees, called "balance protection," on some of the prepaid cards. Under the Dodd-Frank financial overhaul law, banks with more than $10 billion in assets are barred from levying overdraft fees on customers' checking accounts.
Many fees are virtually impossible to dodge, some employees say. A Victoria's Secret employee, Bintou Kamara, for example, said it cost her $1.50 just to transfer money from her Citi payroll card to her checking account.
"I just make such little money that it seems like a lot to pay just to get access to it," said Ms. Kamara, 23, who works as a sales clerk in New York.
Naoki Fuji, a policy associate at Retail Action Project, an advocacy group for retail workers, said, "These are people who can least afford to fork over huge fees."
On some of its payroll cards, NetSpend charges $2.25 for out-of-network A.T.M. withdrawals, 50 cents for balance inquiries via a representative, 50 cents for a purchase using the card, $5 for statement reprints, $10 to close an account, $25 for a balance-protection program and $7.50 after 60 days of inactivity, according to an April presentation by the company reviewed by The Times.
Patrick Brown, NetSpend's senior vice president, said the company was "passionate that consumers can access their wages free of charge," providing an A.T.M. navigator to help employees find fee-free cash machines.
Some large retailers, like Home Depot, Wal-Mart, Walgreen and Limited Brands, the parent company of Victoria's Secret, say they let employees choose whether they will receive their wages through direct deposit or a prepaid card, along with checks in some cases.
In other cases, employees say that while they do get some free cash withdrawals at certain A.T.M.'s, it is difficult to find the right machines in their neighborhoods. Ms. Das of Citigroup said that its "payroll card holders have access to over 27,000 A.T.M.'s across the country."
Problems arise, though, when employers mandate the use of prepaid cards. In 25 states, employers are allowed to forgo paper checks and offer direct deposit or payroll cards; in the remaining states, regulations are less clear and employers are taking a risk by not offering a paper-check option, too, according to research by Madeline K. Aufseeser, an analyst at Aite. It is unclear how many employers offer payroll cards.
For low-wage employees, the fees can lead to unusual solutions.
Krystal McLemore, 22, makes $7.65 an hour at a Taco Bell in St. Louis. She said she was told to sign up for a payroll card. (Taco Bell says it "offers direct deposit and a voluntary option of payroll cards as an added convenience" for employees.)
But she grew tired of being charged $1.75, in addition to the A.T.M.'s fees, to withdraw cash. After a tip from a co-worker, Ms. McLemore realized she could reduce her charges if she took out all her wages once a month. Now, supplied with one of the most modern banking products, Ms. McLemore has a decidedly old-fashioned way of handling her pay: it is stacked in a shoe box in her closet in $10s and $20s.
"It costs too much to get my money," she said.
—By Jessica Silver-Greenberg and Stephanie Clifford, The New York Times