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New York Attorney General 'Probing' Prepaid Payroll Cards: Report (Update 2)

Updated from July 3, with comments from McDonald's.

NEW YORK ( TheStreet) -- New York Attorney General Eric Schneiderman is reportedly looking into several large employers in the state over their use of prepaid payroll cards to pay their hourly employees.

According to an article last week by the New York Times, citing people "briefed in the matter," the attorney general's office has sent letters to 20 companies, including McDonald's (MCD - Get Report), Walgreens (WAG) and Wal-Mart Stores (WMT - Get Report).

An email to the AG's office was not returned.

McDonald's shares were rising 0.4% to $100.30 on Monday; Walgreens shares were rising 0.6% to $44.50: Wal-Mart shares were rising 1.1% to $76.05.

As more and more companies abandon paper checks in favor of the prepaid cards, a growing number of critics are questioning the fees generated from the use of the cards, ranging from 50 cents for a balance inquiry to $2.25 for an out-of-network ATM, which can take a bite out of workers' wages, the article says.

Many employees say they aren't given the choice between paper and plastic. And some employees, afraid to rock the boat at their employers are afraid to ask for another option, the article says.

New York Attorney General Schneiderman is looking into whether the companies have violated any state labor laws because under state law, "employees must give their explicit consent before companies can credit funds to a payroll card," the New York Times says.

Schneiderman is also investigating whether the employers have forced workers to accept payment via payroll cards in order to be hired, among other things.

"We are concerned about excessive or insufficiently disclosed fees which may unduly reduce employees' take home pay," Schneiderman wrote in the letter, according to New York Times.

Card issuers including Citigroup (C), JPMorgan Chase (JPM), Visa (V), MasterCard (MA) and other players say the cards benefit low-wage workers, including those so-called unbanked or under-banked consumers, who don't have bank accounts. The companies also tout that the fees on the cards are generally lower than check-cashing services.

"We offer our associates multiple ways to access their wages without fees," says Wal-Mart company spokesman Randy Hargrove. Employees can pay through direct deposit, paper checks or debit cards "through a program that we believe is one of the most competitive and employee-friendly in the marketplace."

Wal-Mart launched its debit card program in 2009. Hargrove notes that shortly after the launch, the company met with New York Department of Labor and "shared full details about the program."

"McDonald's commitment is to offer choices regarding how employees receive their wages, as well as clear communication and comprehensive education regarding payment options," the company said in a statement emailed to TheStreet. "As part of its wage payment program, McDonald's offers electronic payment options in the form of pay cards or direct deposit to employees. The choices McDonald's provides its employees include several ways for them to receive their pay without incurring fees."

However, approximately 80% of McDonald's restaurants are operated by franchisees. The company said that for those restaurants, franchisees determine the payment options for their employees.

Walgreens told New York Times the payroll card was one option among many; McDonald's declined to comment, while Wal-Mart also said that it allowed employees to choose how to receive wages.

A follow-up email to Walgreens were not immediately answered.

-- Written by Laurie Kulikowski in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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