BILL ANALYSIS Ó
AB 51
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Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
AB 51 (Yamada) - As Amended: March 31, 2011
SUBJECT : Payroll cards.
SUMMARY : Authorizes employers to pay employee wages by means
of payroll cards that meet certain specified conditions.
Specifically, this bill :
1)States that nothing in current law prohibits an employer from
paying an employee's wages through a payroll card program,
provided that all of the following requirements are satisfied:
a) The employer has obtained the employee's voluntary
written consent to receive wages by payroll card, as
specified
b) The employer has not made participation in the payroll
card program a condition of hire or continued employment.
c) The employer has offered the employee, and the employee
has declined, both the option of receiving his or her wages
by direct deposit to a depository account of the employee's
choosing and the option of receiving payment by paper
check.
d) The contract the employer has entered into with the
issuer requires that the issuer provide the employee, at no
cost to the employee, all of the following:
i) The right to make at least two withdrawals per pay
period from an automated teller machine (ATM) on the day
of and after each deposit of wages, as specified.
ii) At least one method to withdraw the entire amount
of wages for each pay period.
iii) A specified periodic transaction statement.
iv) A transaction history for the preceding 12-month
period.
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v) Electronic balance notifications for each day or
after each transaction, at the request of the employee.
vi) An annual notice by postal mail informing the
employee of his or her right to request periodic
statements, 12-month transaction histories, and
electronic balance notifications.
e) The issuer or employer does not charge the employee
specified fees or charges for certain activities.
f) The funds in the payroll card account do not expire, as
specified.
g) The payroll card account is not linked to any form of
credit, including a loan against future wages or a cash
advance on future wages.
h) The employer honors a request by the employee to change
the method of receiving wages from the payroll card account
to another method that is allowed by law, within two pay
periods from the time of the request.
i) The payroll card account is insured by the Federal
Deposit Insurance Corporation or the National Credit Union
Administration on a pass-through basis to the employee.
2)Prohibits an employer or issuer from engaging in unfair,
deceptive, or abusive practices in connection with offering or
administering a payroll card program.
3)Specifies that provisions of existing law related to the
provision by the employer of an accurate itemized wage
statement apply to payment by payroll cards.
4)Makes other related and conforming changes.
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
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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
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
-------------------------
<1> Hora, Raymond. "Pay Cards as a Payroll Option." California
Research Bureau (September 2005).
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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
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."
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Treatment Under California Law
California law currently only expressly allows for three types
of payment for employment: cash, check, and direct deposit.
(California Labor Code sections 213 and 226). Specifically,
these provisions of law:
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."
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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.
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 (2005) 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
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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
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.
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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
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.
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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
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
---------------------------
<2> The opinion letter was directed to two payroll card provider
companies, rather than to an employer or employers.
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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.
According to DLSE's letter, one transaction each pay period
without fees satisfied the requirement that wages be payable on
demand without discount.
Was the 2008 DLSE Opinion Letter Even Valid?
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 in the first
place).
AB 1591 (Yamada) from 2010
Last year, AB 1591 (Yamada) would have prohibited an employer
from requiring an employee to receive his or her wages by
payroll card unless the employee voluntarily agreed in writing
to do so and the employer offered the employee an alternative
lawful method to receive his or her wages. AB 1591 was set but
not heard in the Assembly Committee on Labor and Employment.
ARGUMENTS IN SUPPORT :
According to the author, payroll cards - cards issued by an
employer in lieu of wages that functions similar to an ATM or
debit card - have grown in use among employers seeking to find
an alternative to paper checks when paying employees that cannot
or do not want to receive their wages through direct deposit.
This method of payment has many advantages to employers as it is
cheaper than issuing paper checks and simpler for the employer
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to ensure wages are delivered.
The author states that, despite the advantages payroll cards
provide to employers, employees can often encounter problems
receiving their full wages using these cards. Fees on ATM
withdrawals, statements of account activity, point of purchase
sales, and even the simple act of checking on the balance of the
card can substantially reduce the final amount of wages received
through this program. In addition, the employees that commonly
receive payroll cards are those earning minimum wage and do
conduct business with a bank because they cannot afford to lose
even a small fraction of their wages to banking fees.
The author states that current California Law is silent on the
use of payroll cards. Therefore, it is unclear what
protections, if any, exist for employees receiving their wages
by payroll card; what standards, if any, exist for the use of a
payroll card program for an employer; or if the payroll card
method is a legal method for paying employee wages in
California. This uncertainty has resulted in the numerous fee
problems for employees and many issues for employers as well.
Given that there is not a definitive statute that addresses the
use of payroll cards, only the courts can determine the legal
boundaries of the payroll card method of payment. Disputes over
payroll cards and their use are restricted to resolution through
civil suits. This makes restitution for the employee and
employer defense against spurious claims, a costly recourse for
both parties.
Therefore, the author argues that this bill solves these
problems by establishing clear guidelines for employers that
also protect employees from excessive fees. This bill would
also clarify that the payroll card method for the payment of
employee wages is legal in California
ARGUMENTS IN OPPOSITION :
Opponents contend that the use of payroll cards is already valid
and lawful under Labor Code Sections 212 and 213 and the DLSE
opinion letter discussed above. Similar to other alternative
methods of payment, such as direct deposit, an employer must
simply obtain the employee's un-coerced consent, provide at
least one withdrawal of the wages from the card without any
fees, and provide an itemized wage statement.
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Opponents argue, however, that under this bill such restrictions
on the use of payroll cards would be significantly increased.
Despite the fact that receipt of wages on a payroll card by an
employee would still be voluntary, this bill would require
employers and/or issuers to: (1) obtain the employee's consent
only after fully disclosing every potential fee, including the
dollar amount, for which the employee may be charged through use
of the payroll card; (2) offer other methods of payment first
such as direct deposit; (3) issue monthly and/or annual
statements regarding transactions on the account; and (4) issue
daily electronic notifications of transactions. This bill would
also basically prohibit issuers or employers from charging any
fees to the employee for the use of the payroll card, regardless
of the number of transactions. Opponents contend that these
burdensome restrictions on the use of payroll cards will
discourage employers from even contemplating the use of this
method of payment, thereby denying employees a beneficial and
useful method upon which to receive their wages.
Opponents also state that from a financial institutions
perspective, this bill is unworkable. First, the bill prohibits
the charging of a point of sale fee (POS). This is a fee that
is charged by someone other than the financial institution;
however, this bill requires the financial institution to prevent
a fee that cannot be prevented by the financial institution.
Second, the bill prohibits fees for overdrawing the payroll
card. Ensuring that payroll cards do not overdraft is difficult
because the processing of POS transactions my lag behind the
withdrawal of funds at ATMs, therefore the financial institution
may not have the real-time balance at the time of the ATM
withdrawal, which may result in an overdraft. Ensuring that the
balance is not overdrawn is ultimately the responsibility of the
card holder and they should not be immune from service fees that
are paid by checking account holders that overdraw their
accounts. Third, the bill contains conflicting provisions
relating to ATM fees. The measure allows the charging of an ATM
fee after the first two free withdrawals during a pay period;
however, the bill in another provision bans the charging of an
ATM and POS fee entirely. Finally, the bill adds conflicting
responsibilities than what is required under the Federal
Reserve's amendments to Regulation E relating to payroll cards.
This regulation, which implements the federal Electronic Funds
Transfer Act, gave payroll card holders the same consumer
protections credit and debit card holders have with respect to
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withdrawals, dispute resolution, and periodic statements.
In summary, opponents conclude that this bill places overly
burdensome restrictions on employers and financial institutions
regarding the use of payroll cards that renders this method of
payment of wages essentially obsolete, and conflicts with
federal regulations.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation, AFL-CIO (co-sponsor)
Consumers Union (co-sponsor)
Opposition
Associated Builders and Contractors of California
California Bankers Association
California Chamber of Commerce
California Farm Bureau Federation
California Grocers Association
California Retailers Association
MasterCard Worldwide
Visa
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091