BILL ANALYSIS
AB 1591
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Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
AB 1591 (Yamada) - As Amended: April 14, 2010
SUBJECT : Payment of wages.
SUMMARY : Specifies that the use of payroll cards for the
payment of wages must be voluntary. Specifically, this bill :
1 Prohibits an employer from requiring an employee to receive
his or her wages by payroll card unless the employee
voluntarily agrees in writing to do so and the employer offers
the employee an alternative lawful method to receive his or
her wages.
2)Defines "payroll card" as a stored-value card, or other access
mechanism, issued to an employee by an employer, or other
entity on behalf of the employer, onto which the employer
provides the employee access to his or her wages for
withdrawal or transfer by the employee.
3)Makes existing civil and criminal penalties regarding payment
of wages applicable to violations of these requirements.
FISCAL EFFECT : Unknown
COMMENTS :
Background on Payroll Debit Cards
Payroll cards or "pay cards" (also referred to as "stored-value
cards") were introduced in the last decade, but have seen an
increase in recent years as companies such as Visa and
MasterCard began offering their own versions of the service
A 2005 analysis<1> prepared by the California Research Bureau
provides the following summary of the history of payroll debit
cards:
"Stored value cards were introduced in the early 1970s with
"closed loop systems" on college campuses. Students used
-------------------------
<1> Hora, Raymond. "Pay Cards as a Payroll Option." California
Research Bureau (September 2005).
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these cards for meals, bookstore purchases and other
campus-related expenses. In a closed system (close-loop),
the card can only be used for restricted purposes. More
recently, there are gift certificates and gift cards that
can only be used at the sponsoring merchants' locations.
Other examples include mass transit cards and pre-paid
phone cards.
"Open loop systems," another category of stored value card,
were introduced in the mid-1990s in Manhattan, New York,
when Visa Cash, Mondex, and MasterCard branded cards were
introduced into the market. Open system (open-loop) cards
are widely used beyond the issuer's location through a
universal network for PIN-based or signature-based
transactions. Open loop systems were further developed and
used during the 1996 Olympic games in Atlanta, by
participants using a stored value card with the different
merchants. According to industry estimates, more than
2,000 stored value programs are available, with roughly
seven million Visa- or MasterCard- branded stored value
cards in the marketplace today.
Pay Cards, also known as Payroll Cards, use open loop
systems. This gives the cardholder the ability to purchase
items wherever merchants participate in the brand of card,
whether it is Visa or MasterCard. Once a purchase has been
made, the funds stored within the card are automatically
deducted. The cards may also be used at ATMs to withdraw
cash or get cash back from retailers.
Pay Cards are being marketed by third party vendors and
financial institutions to employers as a means of reducing
the cost of processing paper payroll checks. In general,
an employer establishes an account with a selected program
and the program issues the Pay Cards, although some Pay
Card companies have business partners that actually issue
the physical card.
In order to establish an account with a Pay Card program,
an employer pays an initial fee. The continuing monthly
costs of Pay Cards are largely dependant on the volume of
employees using the cards and the fees imposed by the
program and bank. The employer deposits funds into a bank
account that is managed by the Pay Card company, which
issues individual Pay Cards credited with the proper
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payroll amount for each employee. Each cardholder is issued
a Personal Identification Number (PIN) to use with the
card. An employee has the choice to withdraw the funds all
at once as cash or to use the card as a debit card, without
needing to establish a personal banking account.
Depending on the Pay Card program's cardholder fee
schedules, the employee may or may not get charged a
monthly fee, ATM withdrawal fee, and other fee. Pay Cards
may be used at an ATM to withdraw cash or to get cash-back
from participating retail stores. The purchasing power of
the cardholder can extend to online payments, bill
payments, and any other financial transaction. For every
processed pay period, the card is either recharged
physically at a designated station or electronically. A
payroll program can also issue disposable cards loaded with
a fixed sum instead of reloadable cards. Some programs
offer the option of unnamed cards to protect the identity
of the cardholder.
Depending on the features of the Pay Card program, the
cardholder has access to account balance and other
transaction activity via the Internet or through a 1-800
number, and can transfer funds between two cards. Pay
Cards generally are used wherever Visa or MasterCard is
accepted (depending on the card issuer and the brand of
card). These cards may be used internationally to withdraw
funds or make payments if the merchant accepts the branded
card. In the event that the card is lost or stolen,
cardholders are usually issued a replacement card in five
to ten business days."
Treatment Under California Law
California law currently only allows three types of payment for
employment: cash, check, and direct deposit. (California Labor
Code sections 213 and 226). Specifically, these provisions of
law:
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Authorize employers to pay employee wages in cash, as
long as accompanied by a written itemized statement.
Authorize employers to pay employee wages by check or
similar instrument, as long as it is negotiable and payable
in cash, on demand, without discount, at an established
place of business in the state, and is accompanied by a
written itemized statement.
Authorize employers to deposit employee wages directly
into an account in any bank, savings and loan association,
or credit union of the employee's choice in the state,
provided that the employee has voluntarily authorized the
deposit.
The California Labor Code does not expressly allow nor restrict
the usage of pay cards, or stored value cards, in compensating
employee wages.
Labor Code sections 221, 224 and 226 prohibit employers from
charging employees to access their payroll money or from
withholding any amount of an employee's wages. Under Labor Code
section 212, employers are required to provide a location for
employees to cash out paychecks at face value, without a
discount. Section 212 legally obligates the employer to issue
paychecks that are "negotiable and payable in cash, on demand,
without discount, at some established place of business in the
state."
With respect to other states, a 2008 legislative briefing paper
prepared by the American Payroll Association states the
following:
"The wage payment statutes in most states identify the
methods of wage payment that are permitted under that
state's law. At the time that most of these statutes were
enacted, however, payment through a stored value card was
not envisioned. In the past few years, several states have
responded to the new technology by revising their wage
payment statutes and regulations to expressly authorize
this form of wage payment. These states include Colorado,
Delaware, Kansas, Maine, Maryland, Michigan, Minnesota,
Nevada, New Hampshire, North Dakota, Oklahoma Oregon,
Virginia and West Virginia.
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In certain other states (e.g., NC, TX) , the agencies
responsible for enforcing the state wage and hour laws have
posted enforcement positions on their Web sites declaring
that voluntary payment by debit card is a lawful method of
wage payment under the state's current wage payment statute
provided certain conditions are satisfied.
In the remaining states, the wage payment laws uniformly
permit payment by cash or check, and some form of direct
deposit (either voluntary or mandatory). For purposes of
this analysis, the state wage payment statutes generally
fall into the following four categories: (1) statutes that
permit payment by cash, check and direct deposit only; (2)
statutes that allow the employer and employee to agree to
other forms of wage payment; (3) statutes that permit
payment by "other acknowledgements of indebtedness"; and
(4) statutes that do not regulate the method of wage
payment."
Prior Legislation on Payroll Cards and Related Issues
AB 822 (Benoit) of 2005 would have amended the Labor Code to
specifically authorize an employer to deposit employee wages on
electronic paycards, as specified, including a requirement that
the practice be voluntarily authorized by the employee. That
bill was sponsored by the California Chamber of Commerce.
However, opponents expressed concerns that such legislation
would circumvent the requirement that wages be payable "without
discount" due to a lack of limitation on fees and other
protections.
At the time, opponents pointed out that the rise in the use of
electronic pay cards has not been without criticism. For
example, some consumer advocates have argued that this trend
sends the wrong message to the working poor about the value of
saving money. In addition, some critics have argued that this
method of payment benefits the employers and banks more than the
workers by simply shifting costs from the company to the worker.
According to some advocates, banks can benefit by this method
because they can invest the funds that are stored on the cards;
however, workers generally do not earn interest or any of the
other benefits associated with having a bank account.
The committee analysis of AB 822 pointed out that Consumers
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Union has pointed out the following issues and questions, among
others, for employers and workers to consider in contemplating
the use of pay cards generally:
Can the card be overdrawn? Some payroll cards are
set up so that they cannot be used if there is no money
in the account. Other cards allow employees to take more
money out that has been paid, subject to a high overdraft
fee.
Some payroll cards allow for payday loans or cash
advances from future paychecks that have not yet been
made. These loans and advances can have high fees.
If the employee owes money to the bank or company
that issues the card, can it take payroll funds to repay
that debt? Can other creditors reach into the account
and take or freeze employee pay?
Some payroll cards offer a feature for direct bill
payment (such as utility bills), but other cards do not.
Does the contract between the employer and the bank
or pay card company protect private information about
where and when employees use the card, and for what
purposes?
Can employees obtain all of the information about
the card (including customer service) in a primary
language other than English?
Some pay card providers charge consumers a fee per
minute to speak to a customer service representative.
Testimony was taken on AB 822, but no vote was taken at the time
and the bill did not pass the Legislature.
A separate but related issue also arose several years ago
following concerns that some banks in California were charging
check-cashing fees to non-customers to cash their payroll
checks. Several measures were introduced in an attempt to
address these issues, including the following:
SB 1188 (Florez) of 2006 would have defined "without
discount" for purposes of payment of wages by check or
similar instrument to mean without a fee charged by the
bank or place of business at which the instrument is
payable. SB 1188 passed this committee but failed passage
in the Assembly Committee on Banking and Finance.
SB 778 (Florez) of 2005 would have added a provision
to the Financial Code to specifically prohibit a
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depository institution that issues paychecks on behalf of
a business client from assessing any charge or fee on an
individual seeking to cash a paycheck issued by the
business client if the paycheck is in payment of wages
due, or to become dues, or as an advance on wages to be
earned. SB 778 failed passage in the Assembly Committee
on Banking and Finance.
SB 1916 (Florez) of 2004 would have required the state
to make fee-free paycheck cashing services to its
employees. SB 1916 was referred to the Assembly Committee
on Banking and Finance but was never heard.
SB 1904 (Florez) of 2004 had many versions.
Originally, the bill would have prohibited a bank from
charging an individual who lacked an account at that bank
a fee for cashing his or her paycheck if that paycheck was
provided to the employee by a business client of the bank.
However, the bill was subsequently amended in the
Assembly Committee on Banking and Finance to instead
exempt employers from the provisions of Labor Code Section
212(a) if they offered direct deposit to their employees
and either (1) advised the employees that a transaction
fee could be avoided if the employee authorized the direct
deposit, (2) agreed to pay the transaction fee, or (3)
arranged with the financial institution to avoid the
transaction fee. SB 1904 was re-referred to this
committee. However, it was subsequently amended on August
9, 2004 back to the prior version of the bill and
re-referred back to the Assembly Committee on Banking and
Finance where it failed passage.
The Subsequent (2008) Division of Labor Standards Enforcement
Opinion Letter
Despite the fact that the 2005 legislation did not pass the
Legislature, in 2008 the Division of Labor Standards Enforcement
(DLSE) issued an opinion letter in response to an inquiry from
two companies<2> concerning whether the use of "payroll debit
cards" and "paycards" complies with California law.
DLSE stated that the payroll cards at issue in that case
involved both the direct deposit of wages and a means of
accessing those wages using an electronic card. Accordingly,
they stated that the program must satisfy the requirements set
---------------------------
<2> The opinion letter was directed to two payroll card provider
companies, rather than to an employer or employers.
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for in Labor Code section 213(d) for direct deposit, including
that the employee participation be voluntary.
DLSE also indicated that the "voluntariness" requirement was
also in accord with the requirements of the federal Electronic
Fund Transfer Act (EFTA) 15 U.S.C. Section 1693 et seq. The
EFTA is implemented and administered by the Board of Governor of
the Federal Reserve System (FRB) through "Regulation E" (12 CFR
Part 205), which was amended in July 2007 to expressly make
"payroll cards" subject to the EFTA. Therefore, in its opinion
letter DLSE stated the following:
"Employee choice is thus a fundamental condition for
payment methods utilizing
direct deposits under California wage payment law. Also,
the optional nature of an
employee's participation is further mandated under FRB's
Regulation E which states:
'No financial institution or other person may require a
consumer to establish an
account for receipt of electronic fund transfers with a
particular institution as a
condition of employment or receipt of governmental
benefit.' (12 CFR 205.10(e)?
?Since an employee's participation in the payroll card
program is optional and
provided that the employee has voluntarily and specifically
authorized the deposit,
the payroll card programs simply provide another
alternative for employees to
receive their wage payments by direct deposit. Thus, the
two programs sufficiently
satisfy the voluntary requirement in Labor Code section
213(d)."
In addition, the DLSE opinion letter stated that the program
must satisfy the requirements for payment using an
acknowledgment of indebtedness under section 212(a) such as the
requirement that wages be payable in cash, on demand, without
discount, at an established place of business in the state.
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According to DLSE's letter, one transaction each pay period
without fees satisfied the requirement that wages be payable on
demand without discount.
ARGUMENTS IN SUPPORT :
According to the author, this bill was introduced in response to
a number of complaints she received from individuals who
received mandatory payroll cards for work they performed in
retail establishments over the holiday season.
The author states that unfortunately, in many instances, the
financial institution is one that is chartered out of state and
has extremely limited presence within the state. Often this
representation is a single branch within the state and no ATMs.
This means that the employee only has two options of receiving
their wages: use an ATM of a different bank that will force an
ATM fee in the range of $2 to $3, or use the card as a debit
card at a retailer for a purchase and "cash back", which may
incur a point-of-sale fee. The author argues that most retail
employers with minimum wage and part-time employees use this
payment method. In addition, many of these workers have
multiple jobs with a different payroll card for each. This
means that if these low-income workers withdraw their wages only
once a week, they could be spending up to 10 percent of their
income on ATM fees.
The author states that current law prohibits employers from
issuing wages in a form that forces the employee to receive
their wages at a discount. The law also states that having one
place of business within the state where the employee can redeem
their wages without discount satisfies this requirement of the
law. This has proven insufficient as many payroll card
providers from out of state have established one place of
business in the entire state and then proceeded to operate
throughout the entire state. This leaves employees with few or
no options to receive their wages in full for their labor.
The author argues that while payroll cards provide benefits to
employers, from the perspective of the employee, payroll cards
can be inconvenient and costly compared to cash, check, or
direct deposit into an employee's personal account at their
chosen financial institution. Therefore, the author states that
this bill required employers to offer their employees
alternative methods of payment and to obtain the written consent
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of an employee before issuing a payroll card.
Writing in support of this bill, Consumers Union argues that,
although payroll cards have increased in use, they may not
provide the best method for obtaining wages for all consumers.
They state that some payroll cards may have high fee structures,
some payroll cards may not be easily used, or some payroll cards
may simply be too burdensome to use. This bill ensures that
consumers will have a choice in the method in which they obtain
their wages.
COMMITTEE STAFF COMMENT :
If DLSE's legal interpretation of the interplay between Labor
Code sections 212 and 213 and federal regulations is correct,
then a question may be raised as to whether this bill is
necessary since Labor Code section 213(d) is clear that the
employee must "voluntarily authorize" the transaction and the
DLSE has opined as such. If DLSE's opinion letter is lawful and
correct, then this perhaps becomes an enforcement question as to
why employees are currently being required to accept payment of
wages via payroll card without their consent.
However, the general legality and applicability of DLSE opinion
letters is subject to some debate. This may be especially true
in this case in light of the fact that previous legislative
proposals to specifically authorize payroll cards did not pass
the Legislature. Therefore, since the statute is silent, some
may disagree with DLSE's legal opinion that such a form of
payment is lawful under existing California law (or even whether
they had authority to issue such an opinion letter). As a
result, there may be concern that this bill may authorize
payroll cards while only codifying a "voluntariness" requirement
- without some of the fee limitations and other consumer
protections that were raised during the 2005 legislative
discussion of this issue.
On April 16, 2010, the author's office indicated that she would
like to have testimony heard on the bill, but no vote taken.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumers Union
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Opposition
None on file.
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091