California’s wage and hour laws are more detailed than any other state’s. To facilitate education about the myriad requirements, the Legislature has included at least one substantial penalty for each failure to abide. So, employers must be cautious before deviating from the letter of the law.

Employers may be tempted to begin paying employees with “stored value” cards, or pay cards. Employers and their lawyers must ensure that a pay-card program complies with several wage and hour laws that have not kept up with technology.

Law Regarding Paychecks

Normally known for cutting-edge employment laws, California law governing wage payments is outdated. Under Labor Code Section 212, the default position is that employees must be paid in cash. Section 212 prohibits payment in “scrip, coupon, cards, or other thing redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money.” No one wants to be paid in ball bearings or gift cards.

Section 212 prescribes the method by which employees may receive wages via other methods. Any payment other than in cash (for example, a paycheck) must be “negotiable,” payable in cash on demand and without discount, at an established place of business in the state, the name and address of which must appear on the instrument. If the paycheck is drawn on a bank, the address is not necessary as long as the employee can cash the check at any branch of the bank.

Paper checks can be inconvenient. A paycheck is easily lost. It must be deposited or cashed, which is not always easy to do. The law allows employers to choose just a single business located somewhere in California where employees can cash their paychecks for free.

Direct Deposit

For employees’ convenience, California law permits “direct deposit” of wages. Labor Code Section 213(a) provides that direct deposit must be voluntary. Employers cannot require employees to have a bank account into which a direct deposit may be made. Last year, the Legislature for the first time amended Section 213 to permit an employee’s final wages to be direct deposited, if the employee was already voluntarily participating in direct deposit.

Direct deposit is more convenient than a paper check but has its flaws. For employers, direct deposit can be cumbersome. Paper receipts and wage statements must be delivered to employees just like paychecks. Employees don’t always want wages to be deposited in a bank. Some want to cash a paycheck at a third-party establishment.

Pay Cards

As banking and payroll technology improves, banks and employers have sought to reduce costs while enhancing benefits. Enter the pay card. A pay card is similar to a debit card, except that there is no need for a bank account. The money is held in an account on the employee’s behalf.

Employers need not print checks, stuff envelopes, replace lost checks, mail checks with sensitive employee information and pay bank fees associated with cashing the checks. Banks need not incur transaction costs associated with negotiating checks. Employees have instant access to their money without having to deposit it. The pay card is easily replaced if lost or stolen. It has a PIN number so it cannot easily be stolen. Better living through technology, right?

But whether a pay card qualifies as a proper method of payment under Labor Code Section 212 remains questionable. There is no statute or law specifically prohibiting or authorizing pay cards.

Direct deposit must be voluntary. But if pay cards qualify under Section 212, employers could make them mandatory. After all, if an employer’s method of payment is lawful under Section 212, an employee cannot require payment to be made in another way.

If pay cards do not comply with Section 212, they probably can’t be used at all. They are not a form of direct deposit in that funds aren’t deposited to the employee’s choice of institution. Therefore, it is important to ensure a pay-card program complies with Section 212.

Withdrawing Cash Without a Fee

Section 212 requires noncash wages to be paid with an “instrument” that is negotiable, payable in cash, without discount and able to be cashed at a place of business located in the state. Therefore, pay-card programs likely must allow for withdrawal of the entire balance of the wages paid, without fees

or restrictions, at some location in the state. The pay card itself must include the name of the business that will cash it without charge (and its address if the business is not a bank). However, the Division of Labor Standards Enforcement has said that a booklet containing the locations where the card may be cashed is sufficient.

Although a free withdrawal at an ATM complies, it is unclear how employees will be able to withdraw the entire check at ATMs alone. ATMs do not dispense small bills or coins. Therefore, pay card sponsors may wish to negotiate a deal with a bank or other institution that will cash the entire pay card, including the fractions of a dollar, without charge.

Banking Issues

Pay card issuers profit from transaction fees. These charges could implicate Section 221, which prohibits employers from recouping wages. But Section 221 would apply only if the employer receives part of the fees. Section 450, however, prohibits employers from requiring employees to pay fees to a third party. The Labor Code prohibits employers from passing along the costs of doing business. Therefore, the pay card, at least initially, should cost the employee nothing. If the employee elects to use the pay card for more than just cashing it out, employers have a solid argument that those costs are not necessarily incurred and, therefore, are properly passed on to the employee.

Section 212 requires wage payments other than in cash to be via a “negotiable instrument” form of payment. The term “negotiable instrument” typically requires a means for transferring ownership free from liability. For example, a check may be endorsed to a third party or to a bank. The labor division, in a 1994 opinion letter, seemed to accept that pay cards are “negotiable instruments,” but there was no analysis of banking law in the letter.

Additionally, in 2004, the Federal Deposit Insurance Corporation proposed a change to its rules that would enable pay cards to be covered by FDIC insurance if the pay-card processor failed. It is unclear whether those rules took effect.

Final Pay and Wage Statements

Final pay may be made only “at the place of discharge” or via direct deposit under Section 213. It is unclear whether a deposit into a pay card would be an authorized means of rendering final pay.

Under Labor Code Section 226, employers must provide employees with a statement accompanying each paycheck. The statement must include a variety of data, including the employer, the employee’s name, rate of pay, hours worked and other information. Payment via pay card would not relieve employers of this obligation. The labor standards division would permit an electronic statement, as long as it could be accessed and printed for free and securely.

The Division of Labor Standards Enforcement’s Position

The Division of Labor Standards Enforcement has opined that a pay-card program could comply with Section 212 if the program was voluntary, featured access to cash without charge and the funds were drawn on a bank with a California presence.

The Legislature has considered, but failed to pass, a bill authorizing the use of pay cards. Bill AB 822, introduced in 2005, would have authorized pay cards provided their use was voluntary and employees were provided at least one free access to an ATM per pay period. That legislation died in committee.

Opponents feared that the money would remain under employer control before the employee withdrew it, that the deposits might not be insured, that employers and banks might benefit from fees charged for using the pay cards and that some employees might not have access to ATMs.

Pay cards probably are lawful if employees have free access to their money. In most cases, pay cards are more user-friendly than paper checks. They may reduce costs for employers, shorten bank lines and decrease reliance on check-cashing services. It seems the concerns of those opposing pay cards may be addressed without compromising the obvious benefits of electronic pay systems.

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