November 24, 2021Payroll

Everything you need to know about pay cards

As more and more U.S. workers join the gig economy — many of whom are working unpredictable hours and earning different rates — employers have their work cut out for them when it comes to figuring out the best way to pay independent contractors

Luckily, in the age of fintech innovation, there are more options than simply cutting checks the old-fashioned way. Businesses can now pay contractors using specialized contractor payment software, payroll platforms and even deposits to digital wallets like Venmo or PayPal, as long as they’re aware of the limitations and regulations around these. Another solution is a pay card, which has its pros and cons. 

What is a pay card?

A pay card, also known as a payroll card, is a prepaid card that employers can use to pay workers. It’s like a gift card of sorts — just for wages. Pay cards behave much like debit cards; holders can use them to pay for items in stores and take money out from ATMs. Workers also typically have access to a digital wallet where they can view their balance and have card information handy to make online purchases. 

Instead of paying workers via check or direct deposit to their bank account, employers that use pay cards load wages onto each worker’s pay card whenever pay is processed. 

Pay cards: The pros and cons

Now that you have a better idea of what pay cards are, let’s take a look at the pros and cons of using these to pay workers.

The advantages of pay cards

At a high level, pay cards enable companies to pay workers that don’t have access to bank accounts. Rather than forcing unbanked and underbanked workers to potentially pay check-cashing fees to access the money they’ve earned, pay cards provide a fast and convenient way to settle up after a job is complete. 

It also allows businesses to pay workers more quickly than a standard two-week pay cycle. Funds are usually transferred to their cards within a day, and workers are able to spend their money by swiping the cards in person or by making digital payments online. 

For organizations that don’t have modern payroll systems and are still relying on paper checks, payroll administrators may find using pay cards speeds up their processes since they can facilitate payments digitally.

While there are definitely some advantages to pay cards, there are also disadvantages to consider.

The disadvantages of pay cards and digital wallets

While pay cards and digital wallets can offer some level of convenience, that may come at a cost to the worker.

Some pay cards come with a number of fees — including activation fees, ATM fees, cash reload fees, and inactivity fees, among others. At the same time, many pay cards charge fees when workers want to transfer money from their cards to their bank accounts immediately when they get paid (e.g., to pay rent). Someone might also lose their pay card, and — depending on the issuing vendor — they might have to pay fees for a replacement.

When it comes to using the pay card, vendor acceptance may be an issue. Workers generally can’t use pay cards or digital wallets on critical expenses like rent, health insurance, and utility bills. Believe it or not, even filling up their car can be an aggravating experience if there’s a temporary authorization charge that exceeds their balance. Most cards have limits, which makes it difficult for workers to build up savings if they’re using it as a replacement for a savings account. Workers who do have bank accounts and want to transfer funds to it will have to wait a couple days for the transfer to go through, which may mean turning to things like payday loans to get by.

Issuing the cards can also pose challenges. You’ll either have to keep a stack of cards on hand to pass out manually, which can be hard in a remote-work world, or the worker may need to request a card from the vendor. The latter can cause delays in getting people paid when they first start a job, as it usually takes a week or more to get the card. 

Most card programs will require your workers to interface with the pay vendor whenever they need to handle things around their pay, like to set up an account or request a transfer. This may not be a big deal to some businesses, but if you’re paying a lot of contract workers at once, it can create friction or confusion during the new worker onboarding process. 

Are pay cards the best way to pay independent contractors?

While pay cards can be a good match for some unbanked and underbanked workers, workers should still have the option to receive deposits into the account of their choosing if possible. Plus, employers that pay W2 workers are legally required, under Regulation E, to give employees the option of getting funds other ways (e.g., a check or direct deposit in their account of choice) so a pay card program alone may not work for your business. Failure to comply with this regulation could result in fines and other punishments.

If your organization runs payroll for independent contractors and W2 employees, look for a payroll provider that enables you to pay both classes of employees while offering them flexible pay options. 

With the right solution, workers can choose how, where, and when to get paid — even if they want their money today or tomorrow. And they’ll also be able to use that money however they want — whether it’s paying the landlord, transferring it to their Venmo account, or just setting it aside for a rainy day.

Add it all up, and flexible pay gives workers peace of mind. At the same time, flexible pay makes life easier for payroll teams, saving organizations time and money along the way. 

Learn more about the benefits of flexible pay.