July 20, 2015

Kmart Sued for Use of Payroll Debit Card System

A class of employees is suing Kmart in a California state court for allegedly engaging in unfair business and employment practices in its use of payroll debit cards.

Payroll debit cards have become popular, especially in the retail and fast food industries. Instead of a paycheck or direct deposit, the employer loads funds onto a debit card held by the employee. The employee then uses the debit card to withdraw cash and pay bills.

In the California lawsuit, the plaintiffs claim (among other things) that

  • Kmart earns interest on the payroll funds not withdrawn from the debit card, thereby using employee wages for investment purposes.
  • Employees must pay fifty cents each time they make a withdrawal, thus depriving them of their full wages.
  • Employees face other limitations, such as not being able to withdraw all their wages at the same time.

The lawsuit seeks various kinds of relief, including restitution and punitive damages.

We previously summarized the legal issues surrounding payroll debit cards here. We identified two sources of law affecting payroll debit cards in Washington State.

First, we described a bulletin issued by the Consumer Financial Protection Bureau (CFPB) that applies the Electronic Fund Transfer Act and Regulation E to payroll debit card accounts. Under that Bulletin, the CFPB announced that

  • Employers may not require their employees to receive wages by payroll card, but must offer a substitute method, such as direct deposit or paper check.
  • Employees must be informed of all fees, limitations on liability, and requirements related to making electronic fund transfers with the payroll card.
  • The payroll card issuer must disclose specified information about the employee’s account balance and transaction history.
  • Employees are entitled to limited liability protections for the unauthorized use of their payroll cards and designated rights to correct account errors.

Second, we noted that the rules in Washington State are less elaborate. We reported, however, the Department of Labor & Industries agrees with the CFPB on one essential point: if there are fees for using payroll cards, the employer must provide an alternative that allows access to wages without any fees or costs.

For more information about payroll debit cards, please contact Foster Pepper’s Employment & Labor group or Financial Institutions group.

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