Payroll Debit Cards in California: What’s the Law for Employers?

Just the other day, one of our attorneys, wrote a blog post about the payment of wages under California’s Labor Code. In it, he briefly discussed whether employers are allowed to use payroll debit cards as a method of paying their workers.

Today, a story broke about a lawsuit over the use of payroll debit cards. The story blew up on Reddit, garnering over 700 comments from users. So it seems like a good time to revisit the issue of payroll debit cards in more depth.

What is a Payroll Debit Card?

The concept of payroll debit cards is simple: rather than getting paid through cash or a check, employees receive their payments on a bank card. The employees can then use that card to spend money, like a credit or debit card. Or they can go to a bank or ATM and withdraw money to get the cash.

Employers sometimes choose to use these cards because they allow them to save money associated with checks. Distributing and mailing paper checks can be costly, and paying employees in cash is usually not feasible for a business. In some cases, employers may receive benefits for switching over to a payroll debit card system.

The risk in using these cards, however, is the financial burden on the workers. The use of a payroll debit cards sometimes shifts all payroll costs to the employee. The banks, for instance, may charge numerous fees for using these cards, including processing fees, fees for using ATMs, and fees for inactivity. The banks may also benefit by receiving new customers—the employees.

Because the banks may gain new business from the use of payroll debit cards, they sometimes provide financial incentives for employers to issue the payroll debit cards to their employees. So it’s easy to see why the trend toward payroll debit cards is growing among employers. But is this kind of payment legal?

California’s Law on Payroll Debit Cards.

In California, the law on payroll debit cards appears relatively sparse. No court cases have decided whether these kinds of payments are permissible and there is no law directly on point. Related laws, however, provide guidance on alternative payment methods.

Generally, employers must pay their employees in a form that is negotiable and payable in cash. A check, for instance, can be taken to a bank and cashed. It’s therefore a method of pay that is payable in cash.

An employer may not, however, issue a form of payment that would be discounted if turned into cash. So, an employer cannot issue a check from a bank that will charge a fee when cashing it.

The form of payment the employer chooses must be able to be cashed at an established place of business in the state. For the most part, this means that the payment method must be allowed to be cashed at a bank. The name of the bank must appear on the form of payment. If the business cashing the payment is someone other than a bank, their address must also appear on the form of payment.

Employers may not offer any scrip or coupon that is not redeemable in cash. This, in essence, prevents business from paying their employees with coupons that can only be used in their store. (See, e.g., company scrips).

Employers, or their managers and agents, may be guilty of a misdemeanor if they violate these rules. They could also be liable to the employees for civil damages.

Overall, however, employers are allowed to pay their employees in cash alternatives, as long as they can be turned into cash easily and without a fee. Employees must also receive an itemized paystub with their payment.

Because employers can pay their employees in cash alternatives, they are permitted to make payments through direct deposit or through the use of payroll debit cards. In fact, the law specifically permits employers to deposit funds in a bank of the employee’s choice.

The California Labor Commissioner’s Office, also known as the Division of Labor Standards Enforcement (DLSE), has stated in an opinion letter that the law does not prohibit the use of payroll debit cards. It is important, however, that participation in the payroll debit card program is optional for the employee. The employer may give the employee the option of using payroll debit cards, but may not require their use. Any payroll debit card program must be completely voluntary.

The McDonald’s Payroll Debit Card Lawsuit.

Yesterday, Natalie Gunshannon, a 27-year-old former McDonald’s employee, filed a class-action lawsuit in Pennsylvania County Court. Her lawsuit is against her former employers—Albert and Carol Mueller, the owners of 16 McDonald’s franchises.

According to news sources, the lawsuit alleges that the Muellers forced their McDonald’s employees to receive payment in only one way: with payroll debit cards. Checks, direct deposit, and cash were allegedly not available options.

According to the lawsuit’s allegations, the fees on these payroll debit cards are pretty outrageous:

The J.P. Morgan Chase payroll card carries fees for nearly every type of transaction, according to the lawsuit, including a $1.50 charge for ATM withdrawals, $5 for over-the-counter cash withdrawals, $1 to check the balance, 75 cents per online bill payment and $10 per month if the card is left inactive for more than three months.

Bob Kalinowski & Michael R. Sisak, The Times-Tribune

How would this Lawsuit be Treated in California?

Even though the McDonald’s payroll debit card lawsuit takes place in Pennsylvania, it’s interesting to look at it as a case study—a case study in what not to do, unfortunately. Of course, the law in Pennsylvania may be completely different than the law in California. Nevertheless, several alleged actions of the franchise owner would seem to violate the rights of the employees.

If the allegations of the lawsuit are true, several aspects of the payroll cards would violate California law. First, enrollment into the payroll debit card program is compulsory. California’s DLSE has opined that enrollment in these programs must be voluntary. California employers cannot force their employees to accept payroll debit cards as a form of payment.

Second, the bank charges fees for withdrawals on the card—ranging from $1.50 to $5. In California, payroll cash alternatives must be easily turned into cash without a fee, if that's what the employee wants. California employers therefore cannot issue a card to employees if there are fees to withdraw the funds on it.

Overall, if Ms. Gunshannon’s allegations are true, she would appear to have a winning case in California.


References

Labor Code, § 212, subd. (a)(1).
Id.
Id.
Labor Code, § 212, subd. (c).
Labor Code, § 212, subd. (a)(2).
Labor Code, § 215.
Labor Code, § 213, subd. (d).
Ltr. from Div. of Labor Standards Enf. (State of Cal.) to Carl Morris & Daniel Schwallie re Payroll Debit Cards (July 7, 2008), available at https://www.dir.ca.gov/dlse/opinions/2008-07-07.pdf.