The California Department of Labor Standards Enforcement recently approved the use of payroll debit cards and “Money Network checks” for the payment of wages under the California Labor Code as long as they meet certain conditions.  In the DLSE’s opinion, employers may use these alternate payment methods if they make the full amount of wages available to employees on their regularly scheduled payday, without penalty or reduction, and employees’ participation in the programs is voluntary.  The programs also must provide a sufficiently extensive network of ATMs and other locations at which employees may access their accounts.

Applicable Law

Under Section 212 of California’s Labor Code, employers are prohibited from paying wages using any instrument unless it “is negotiable and payable in cash, on demand, without discount, at some established place of business in the state, the name and address of which must appear on the instrument, and at the time of its issuance and for a reasonable time thereafter, which must be at least 30 days, the maker or drawer has sufficient funds in, or credit, arrangement, or understanding with the drawee for its payment.” 

Section 213 of the Labor Code permits employers to make direct deposits of wages in employees’ accounts at banks or credit unions with a place of business in California, provided that the employees have voluntarily authorized such deposits.

Types of Payroll Programs

In two opinion letters responding to particular inquiries, the DLSE addressed the use of two types of payroll services – payroll debit cards and a nationwide check cashing service.  The programs are voluntary and employees may elect, at any time, to receive their wages by direct deposit into an account at their own bank or credit union.

In the payroll debit card programs, employers enter into agreements with payroll distribution service providers to manage their payrolls.  Payroll debit cards are issued pursuant to agreements between the payroll distribution service providers and national banks.  Payroll debit cards are either proprietary or “nationally branded,” typically with a “VISA” logo, which allows employees not only to make ATM withdrawals, but also to make purchases and receive cash from numerous merchants and other entities. 

To fund the cards, employers deposit employee payroll into individual employee accounts at an FDIC-member bank.  The employer provides participating employees with a card which is encoded with account information.  On the scheduled payday, employees have immediate access to their wages in their accounts.  Employees are permitted to make at least one fee-free withdrawal per pay period at any VISA-member financial institution or other entity, certain ATMs and any retailer participating in the VISA network.

In the nationwide check cashing program, employers deposit employee payroll into a pooled account established for the benefit of employees at an FDIC-member federal savings association.  Employees are provided a supply of un-denominated “Money Network checks”.  On payday, employees call the Money Network service at a toll-free number to obtain authorization information (issuer and transaction numbers).  The authorization information is written in designated spaces on the face of a Money Network check; checks are not valid without that information.  To obtain pay as cash, the employee makes himself or herself the payee on the check.  The Money Network check can be cashed (one check fee-free per payroll period) at the “ACE Cash Express” address in California designated on the face of the check, or at any other ACE or Wal-Mart location in California.

DLSE’s Analysis

While the DLSE found that the payroll debit card programs had elements of a traditional direct deposit arrangement, they went beyond traditional direct deposit arrangements by providing employees with access to their wages through an electronic debit card.  Accordingly, the DLSE analyzed the programs under Sections 213 and 212 and found that they satisfied both statutes. 

Addressing the requirements of Section 213, the DLSE found that the programs complied with the “voluntariness” requirement because employees had the option of having their pay directly deposited into their own bank or credit union accounts, rather than using a payroll debit card.  The DLSE also found that the programs complied with the “place of business” requirement based on a broad interpretation of that term.  Furthermore, the DLSE found that, by using electronic fund transfers both to collect the deposits from the employers and to provide employees access to their wages through VISA-member financial institutions and ATMs throughout California, the banks involved in the payroll debit card programs had a sufficient “presence” in California to be considered a “place of business” under Section 213.

Addressing the requirements of Section 212, the DLSE emphasized that payroll debit card programs must ensure that wages are “payable in cash without discount.”  Because the payroll debit card programs provided for at least one transaction per pay period without a fee, the DLSE determined that the programs effectively provided for “immediate and free access to an employee’s wages in full.”  The DLSE further noted that, although employees could withdraw a lesser amount, this option did not “render the use of a payroll card violative of the employee’s right to full and prompt payment of wages.”

Unlike the payroll debit card programs, the DLSE did not find the check cashing program analogous to a direct deposit program.  However, the DLSE stated, “Section 213 cannot be reasonably interpreted, however, to constitute the sole method of payroll distribution which involves payment using bank deposits.”  Rather, employers can use alternate payment methods, as long as they comply with Section 212.  Accordingly, the DLSE analyzed the program under Section 212 and found that it satisfied the statute. 

Specifically, the Money Network program was voluntary, and employees had the option of using a direct deposit arrangement.  The Money Network program allowed employees to obtain their full wages on their scheduled payday without any discount or fee.  The DLSE also noted, “The fact that the employee has a role in finalizing the instrument is no more burdensome than having to appear at a place to obtain one’s paycheck or provide identification verification to an employer or payroll service in order to receive wages in person.”  The DLSE found that the program satisfied the “place of business” requirement because the checks could be cashed at over 300 locations in California.  The DLSE found that the program satisfied the “sufficiency of funds” requirement based on the employer’s irrevocable payment to the account for the benefit of the employees, the maintenance of sufficient funds to cover full payment of the wages, and the employer’s arrangement with the bank for payment of the employees’ full wages. 

* * *

These alternate payment methods likely will be reviewed by the courts.  Meanwhile, these opinion letters allow employers additional flexibility in their wage payment arrangements.  Payroll debit cards and the Money Network checks will assist those employees who do not have bank accounts by providing them with secure access to their wages, without any fees.  Employers considering implementing similar programs should consult with counsel to ensure that they are appropriately structured.  Any such program must be voluntary and presented as an alternative to traditional direct deposit arrangements and must comply with California’s wage payment requirements, including the requirement that employers provide employees with an itemized wage statement for each pay period.