BILL ANALYSIS Ó
AB 51
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Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, 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; and,
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)Defines "issuer" as a payroll card issuer, and includes a
person acting as an agent of an issuer, directly, or
indirectly.
5)Makes other related and conforming changes.
FISCAL EFFECT : Unknown
COMMENTS :
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Need for the bill.
According to information supplied by the author's office:
Payroll cards, a card issued by an employer in lieu of
wages that functions similar to an ATM or debit card, have
grown in use among employers seeking 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 is less expensive than issuing paper
checks and simpler for the employer to deliver wages. In
2005 it was estimated that the cost to employers of issuing
a paper check was between $1 and $2 while electronic funds
transfers cost employers only about 20 cents per employee.
Despite the advantages payroll cards provide to employers,
employees can often encounter problems receiving their full
wages when using these cards. Fees on services associated
with the card can quickly add up to cost the employee a
substantial portion of their earnings. Fees on ATM
withdrawals and point of sale transactions can be up to two
dollars per transaction, balance inquiries can be up to and
over a dollar depending on the method of inquiry, and
contacting a live customer service representative can run
up to three dollars per call. In addition, the employees
that most commonly receive payroll cards are those that are
unbanked or underbanked. A recent survey by the Federal
Deposit Insurance Corporation found that 71% of unbanked
households in the United States earned less than $30,000
per year. These people are the least able to afford the
fees that banks assess on normal checking accounts let
alone the fees associated with a payroll card.
Current California Law is silent on the use of payroll
cards. In 2008 the counsel for the Department of
Industrial Relations' Division of Labor Standards
Enforcement issued two letters at the request of payroll
card companies stating that it interpreted Section 213 of
the Labor Code as authorizing payroll cards since they were
based off an account that wages were deposited directly
into. These two letters have been the basis for payroll
card use in California today. This authorization is
questionable for a number of reasons. Section 213 also
clearly states the financial institution used for direct
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deposit of wages must be of the employee's choice. It is
unclear the level of choice that is being afforded an
employee without a current bank when he or she is offered a
payroll card or direct deposit as the only options of
payment. As a result of this lack of clarity, it is
uncertain 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 employees seeking protection from
exorbitant fees to seek remedy in court. Disputes over
payroll cards and their use often only see resolution
through civil suits. This makes restitution for aggrieved
employees and defense for employers against spurious
claims, a costly recourse for both parties.
AB 51 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.
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 prepared by the California Research Bureau (Pay
Cards as Payroll Option: Raymond Hora) 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,
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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 dependent 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
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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.
Discussion.
This bill is intended to provide a statutory framework for the
offering and use of payroll cards, while implementing
protections for employees who sign-up to use such cards. While
payroll cards are being offered by some employers in California,
state law is vague at best. The Labor Code doesn't specifically
list payroll cards as a legally authorized payment method for
employees. However, in 2008 the Division of Labor Standards
Enforcement (DLSE) issued an opinion letter in response to an
inquiry from two payroll companies 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. Many employers
have issued payroll cards using the DLSE letter as
interpretative authorization to do so. Committee staff
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recommends reading the April 13, 2011 Assembly Labor Committee
analysis for a more detailed discussion of California Labor law
relating to payment of wages and the various interpretations
thereof.
AB 51 fundamentally contains three objectives. First, it
clarifies the ability to use payroll cards for the payment of
wages under specific circumstances and contractual obligations.
Second, it specifies the obligations and disclosures the
employer owes to the employee prior to and during the use of a
payroll card. Thirdly, it places restrictions and obligations
upon the issuer and employer once the card is issued and used.
In the process of considering this bill the committee should be
aware of the following issues:
1)The bill provides that the "issuer" or employer may not charge
the employee various fees for use of the payroll card. The
issuer in this case could be a national bank. In the case of
a national bank that issues a payroll card, the restriction on
fees raises a preemption of state law issue. Typically, state
actions that interfere with the activities of national banks
have been preempted by the courts and the federal regulator of
national banks, the Office of Comptroller of Currency (OCC).
Last year, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) provided somewhat more clarity
on the boundaries of preemption on consumer protection laws by
giving states more authority to enact and enforce state
consumer protection laws that are consistent with Dodd-Frank
and rules promulgated by the Consumer Financial Protection
Bureau (CFPB). The limitations on preemption in Dodd-Frank
provide that state laws are preempted under three
circumstances:
a) The state law prevents or significantly interferes with
the national bank's exercise of its powers in accordance
with the preemption standards set in Barnett Bank of Marion
County, N.A. v. Nelson, 517 U.S. 25 (1996).
b) Application of the law would have a discriminatory
effect on national banks.
c) The state law is preempted by another federal law.
The latter preemption standard is most important for the
discussion of AB 51. Under 12 C.F.R. § 7.4002 national banks
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"may charge its customers non-interest charges and fees."
Additionally, § 7.4002(b)(2) provides that "establishment of
non-interest charges and fees, their amounts, and the method
of calculating them are business decisions to be made by each
bank, in its discretion, according to sound banking judgment
and safe and sound banking principles." OCC interpretative
letters and a number of court cases have opined that state
laws that restrict the fee charges of a national bank are
preempted. A specific example, is contained within the Bank
of America v. the City and County of San Francisco (N.D. Cal.
June 30, 2000) case which concerned local ordinances which
limited ATM fees. In the court's decision their
interpretation is relevant here concerning the power of
national banks to levy fees:
We hold that the National Bank Act and OCC regulations
together preempt conflicting state limitations on the
authority of national banks to collect fees for provision
of deposit and lending-related electronic services?
Committee staff is not making a final determination that the
provision of AB 51 would be preempted as that is an issue that
will be left up to litigation if this bill were to pass.
Instead, the preemption discussion is intended to highlight
potential long-term implementation challenges if this bill
goes forward.
2)The issuer or employer may not charge a Point of Sale (POS)
transaction. The intention in this case may be to prevent
transaction fees imposed by the issuer every time the employee
uses the card. However, it is somewhat overly broad in that
POS fees charged by retailers could be interpreted as the
responsibility of the issuer and/or employer.
3)A fee is allowed after the first two ATM withdrawals, yet in a
different section, no fees may be charged for in-network
withdrawals, or fees not identified in the contract. These
provisions appear to be in conflict as one part of the bill
seems to prohibit fees allowable under other parts of the
bill.
4)Opponents have raised issue regarding the numerous
prohibitions and restrictions required in order to use a
payroll card and that those requirements make the payroll card
option unworkable as an alternative to a paper check.
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Additionally, if a fee were to inadvertently occur, the bill
does not provide a mechanism for the employer or issuer to
refund the fee to avoid a violation.
5)Imprecise definition of "issuer." Issuer under this bill
could be the payroll card issuer, or person acting as the
agent of an issuer. The intention is to include both
financial institutions that offer payroll cards and those
entities that are not financial institutions. In the bill the
issuer or employer must ensure that the payroll card account
is insured by the Federal Deposit Insurance Corporation (FDIC)
or the National Credit Union Administration (NCUA). A
non-bank issuer of payroll cards would not have access to FDIC
or NCUA insurance coverage. Staff believes the intention in
the bill is to clarify that a non-bank issuer must contract
with an institution that has FDIC or NCUA coverage in order to
offer the payroll account. However, because the definition of
"issuer" is somewhat imprecise, these provisions could be
confusing.
6)How will this bill interact with Regulation E, which
implements the Electronic Fund Transfer Act? On July 1, 2007
the Federal Reserve release the final rule concerning the
inclusion of payroll cards under Regulation E (Regulation E;
Docket No. R-1247)
Under the final rule, payroll card accounts specifically
are included in the definition of "account" for purposes of
Regulation E. A "payroll card account" is defined as an
account directly or indirectly established through an
employer to which transfers of the consumer's wages or
other compensation are made on a recurring basis. Section
205.18 of the final rule grants financial institutions
flexibility in providing certain account information to
payroll card users. In particular, a financial institution
need not provide periodic statements under § 205.9 if the
institution: (1) makes available balance information to the
consumer through a readily available telephone line; (2)
makes available to the consumer an electronic history, such
as through an Internet web site, of the consumer's account
transactions covering a period of at least 60 days
preceding the date the consumer electronically accesses the
account; and (3) upon the consumer's oral or written
request, promptly provides a written history of the
consumer's account transactions covering a period of at
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least 60 days prior to the request. The history of account
transactions provided electronically or upon request must
set forth the same type of information required on periodic
statements under Regulation E, including information about
any fees for EFTs imposed during the 60-day period.
7)Would a more appropriate solution be to outline the minimum
standards for payroll card contracts between employers and
issuers?
Amendments.
In an attempt to resolve the aforementioned issues, the proposed
amendments below, change the requirements in the bill and
instead establish the minimum standards for the payroll card
contract between the employer and employee. These amendments
provide that the payroll card offered to the employee, by the
employer must meet the specific standards set out in the bill.
SECTION 1. Section 213.5 is added to the Labor Code, to read:
213.5. (a) For purposes of this section, the following
definitions apply:
(1) "Employer" means a person, partnership firm, corporation,
limited liability company, association, or other entity that
employs a person or persons to perform services for a wage or
salary, and includes a person, partnership firm, corporation,
limited liability company, association, or other entity acting
as an agent of an employer, directly or indirectly.
(2) "Issuer" means a the payroll card issuer, and includes a
person or entity acting as an agent of an issuer, directly or
indirectly.
(3) "Payroll card" means an access mechanism, including a
prepaid card, code, or other device, issued to an employee by an
employer, or by another entity by arrangement with the employer,
through which the employer provides the employee access to his
or her wages.
(4) "Payroll card account" means an account that holds funds
drawn upon by a payroll card.
(5) "Payroll card contract" means a contract entered into by an
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employer with an issuer to provide employees with payroll cards
as a means to pay wages.
(b) Nothing in Section 212 prohibits an employer from paying an
employee's wages through a payroll card program, provided that
all of the following requirements are satisfied:
(1) The employer has obtained the employee's written consent to
receive wages by payroll card. That consent must be voluntary
and not given as a result of intimidation, coercion, or fear of
discharge or reprisal for refusal to participate in the payroll
card program. Prior to obtaining the employee's consent, the
employer shall provide the employee, in the language the
employer normally uses to communicate employment-related
information to the employee, all of the following information:
(A) A description, stated in plain language, of the employee's
options for receiving wages.
(B) The terms and conditions of the payroll card account,
including a clear, conspicuous, and complete itemized list, in a
form the employee may retain for his or her records, of any fees
that may be deducted from the employee's payroll card account by
the issuer. The list shall state the dollar amount of each fee.
(C) A list of the services available to the employee pursuant to
paragraph (4).
(D) All of the information required by subparagraphs (A), (B),
and (C), made available in a clear and conspicuous manner on the
employer's Internet Web site or on an Internet Web site
maintained by the issuer with a clear link from the employer's
Internet Web site.
(2) The employer has not made participation in the payroll card
program a condition of hire or continued employment.
(3) 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.
(4) 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: An employer shall not provide
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wages by payroll card unless the payroll card contract the
employer enters into provides all of the following at no cost to
the employee:
(A) 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. Withdrawals may be limited to ATMs in a
designated network, if the network provides reasonably
convenient proximity and access in relation to the employee's
place of employment or place of residence.
(B) At least one method to withdraw the entire amount of wages
for each pay period.
(C) A periodic statement at least once each month, or at least
once every three months if there is a balance on the payroll
card but no activity on the payroll card account. The employee
may choose to receive electronic or paper statements. Each
statement shall include all transactions during the statement
period, including deposits, withdrawals, fees charged, and other
transactions affecting the payroll card account. The employee
may choose to decline to receive statements.
(D) A transaction history for the 12-month period preceding the
request, at the request of the employee.
(E) Electronic balance notifications for each day or after each
transaction, at the request of the employee.
(F) 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.
(5) The issuer or employer does not charge the employee any of
the following: the payroll card contract does not allow for the
following fees to be charged to an employee by any parties to
the contact:
(A) An application, initiation, loading, participation, or other
fee to receive wages or to obtain the payroll card.
(B) A fee for a point-of-sale transaction, unless the fee is
initiated by a person, firm, partnership, association, or
corporation that accepts credit or debit cards for the
transaction of business and the employee has originated the
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transaction.
(__) A fee for using a method offered by the employer to
withdraw the entire amount of wages for each pay period.
(C) A fee to withdraw funds from a teller or ATM within the
network of the financial institution providing the payroll card
account.
(D) An overdraft, shortage, or low-balance fee.
(E) A fee for a declined transaction.
(F) A fee for account inactivity.
(G) A fee for the first three telephone calls to a live customer
service representative per pay period.
(H) A fee to access balance or other account information online,
by an interactive voice response system, or by any other
automated system offered in conjunction with the payroll card,
or at an ATM in the network of the issuer.
(I) A fee for a written statement or a transaction history.
(J) A fee to close the payroll card account or issue payment of
the remaining balance by check or other means.
(K) A fee to provide at least one replacement card each year.
(L) A fee not expressly identified by type and amount in the
contract between the employer and the issuer.
(6) The funds in the payroll card account do not expire. The
payroll card account may be closed for inactivity, with
reasonable notice to the employee, provided that the remaining
funds in the payroll card account are refunded to the employee
at no cost to the employee. If the payroll card has an
expiration date, the issuer shall provide a new replacement card
to the employee at least 15 days before the expiration date at
no charge to the employee.
(7) 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. This paragraph does not prohibit an issuer from
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honoring an inadvertent overdraft transaction at no additional
charge to the employee.
(8) 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.
(9) 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.
(c) An employer or issuer shall not engage in unfair, deceptive,
or abusive practices in connection with offering or
administering a payroll card program.
(d) Any wages paid using a payroll card program that does not
meet the requirements of this section are considered unpaid
wages for purposes of Section 225.5.
(e) Nothing in this section shall relieve the employer of his or
her obligations under subdivision (a) of Section 226.
Previous Legislation .
AB 822 (Benoit) of 2005 would have allowed an employer to
deposit employee wages on a payroll card. Held in Assembly
Labor Committee.
AB 1591 (Yamada) of 2010 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 Assembly Labor Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation - Sponsor
AFSCME
CA Conference Board of the Amalgamated Transit Union
CA Conference of Machinists
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Consumers Union
Engineers and Scientists of California
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
UNITE HERE!
United Food and Commercial Workers - Western States Conference
Utility Workers Union of America, Local 132
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 : Mark Farouk / > / (916) 319-3081