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Bank Fees for Cashing Paychecks May Be Trouble for Employers Under California Labor Code Requiring Free Check Cashing

By Lawrence H. Stone
  • March 18, 2004

If your company's bank charges a fee for California employees to cash their paychecks, you may feel the sting of a brewing investigation into potential violations of a state statute regulating pay practices.  

California Labor Code section 212 requires employers to arrange for employees to cash paychecks without incurring a fee. The Labor Code says that if the bank charges a fee, then the employer must find another way to comply, such as by designating a location in California where the check can be cashed without charge and by including the name and address of that location on the check. The employer also may have other options, including cashing the check in-house or arranging with the bank that issues the checks to cash them without charge, as many banks already do.  

According to published reports, several years ago Bank of America began to charge a fee for cashing payroll checks in an attempt to persuade employees to open bank accounts. Although California Labor Code Section 212(c) seems to require a bank that issues a payroll check to cash it for free, banks may be able to escape this obligation if the federal Bank Act preempts the California law.  

This situation recently came to light after Wells Fargo decided to introduce its own $5 fee for non-account holders effective April 1, 2004.  On March 17, the San Francisco Chronicle published an article titled "Fees to cash paychecks aren't legal, state says thousands of firms violating labor code," drawing attention to the issue by the California Division of Labor Standards Enforcement. D. Gregory Valenza, Managing Partner of the Jackson Lewis San Francisco office, was quoted in the article.

The penalties for failing to comply with section 212 can be severe (possibly $100 per paycheck plus 25% of the bank's fee). Any employee can bring a class action on behalf of all those seeking the penalties, and the code permits an award of attorneys' fees and the reimbursement of any past bank fees to successful plaintiffs. For the time being, it remains an open question whether an employer ultimately found to have violated the code is entitled to indemnification from the bank that charged the fees.  

It should be noted that the Labor Code section applies only to cashing paychecks at the bank. It does not apply if the checks are deposited at the bank, or if employees pay a fee to a third party unrelated to the bank that issued the check.   

In light of this revelation, there are steps employers who are or may be subject to the California Labor Code should do now to minimize their risk of liability:  

  1. Ensure California employees have a means to cash paychecks without incurring a fee (provide in-house check cashing services, hire a third party with a single location in CA where checks can be cashed, negotiate with the bank charging the fee, pay the bank's fee on behalf of the employees).
  2. Assess whether there may have been a violation of Labor Code Section 212 in the past and determine the potential liability.  
  3. Consult with counsel regarding options for compliance and defense of potential claims.  

The text of California Labor Code Section 212 follows:  

(a) No person, or agent or officer thereof, shall issue in payment of wages due, or to become due, or as an advance on wages tobe earned: 

(1) Any order, check, draft, note, memorandum, or other acknowledgment of indebtedness, 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. 

(2) Any scrip, coupon, cards, or other thing redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money. 

(b) Where an instrument mentioned in subdivision (a) is protested or dishonored, the notice or memorandum of protest or dishonor is admissible as proof of presentation, nonpayment and protest and is presumptive evidence of knowledge of insufficiency of funds or credit with the drawee. 

(c) Notwithstanding paragraph (1) of subdivision (a), if the drawee is a bank, the bank's address need not appear on the instrument and, in that case, the instrument shall be negotiable and payable in cash, on demand, without discount, at any place of business of the drawee chosen by the person entitled to enforce the instrument.

Jackson Lewis attorneys are available to assist employers with this and other California employment law matters.   

©2004 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

Reproduction of this material in whole or in part is prohibited without the express prior written consent of Jackson Lewis P.C., a law firm that built its reputation on providing workplace law representation to management. Founded in 1958, the firm has grown to more than 900 attorneys in major cities nationwide serving clients across a wide range of practices and industries including government relations, healthcare and sports law. More information about Jackson Lewis can be found at www.jacksonlewis.com.

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