Some banks charge a paycheck-cashing fee to employees who don’t hold accounts with them. But the California Department of Industrial Relations (DIR) now says this practice may be illegal. We’ll give you tips on how to steer clear of this problem.
No Fees Allowed for Paycheck Cashing
The issue came to light recently when the San Francisco Chronicle published an article stating that Bank of America charges non-account holders a $5 fee to cash a paycheck issued by a Bank of America business client. Wells Fargo reportedly introduced a similar fee in April 2004.
But on reading about this practice, the DIR quickly stepped into the fray. According to the DIR, this practice of charging a paycheck-cashing fee may run afoul of Labor Code Section 212.
This section provides that paychecks must be negotiable and payable in cash, without a bank “discount” (or charging of a fee), at an established place of business in the state, the name and address of which must appear on the check. However, if the check was drawn on a bank, the bank’s address doesn’t have to appear on the check as long as the check can be cashed, without discount, at any branch of the bank.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Is Bank Fee a “Discount”?
DIR spokesperson Dean Fryer told CEA that the department has requested a legal opinion from California Attorney General Bill Lockyer as to whether a paycheck-cashing fee charged by a bank amounts to a prohibited “discount.” The DIR has also asked Lockyer to clarify two other questions: 1) whether a bank is an agent of the employer, such that a bank that charges a paycheck-cashing fee would be independently liable under Labor Code Section 212; and 2) whether a federal rule authorizing banks to charge fees preempts the state law (note that a federal appeals court in Texas ruled last year that the federal regulation preempted a Texas law similar to Labor Code Section 212).
Also, Sacramento legislators have now introduced a bill in response to this controversy. This measure, SB 1917, would prohibit banks from assessing a charge or fee to cash a paycheck for a person who doesn’t have an account at the bank if the paycheck was issued by the bank for one of its business clients.
Severe Penalties
The penalties for violating Labor Code Section 212 can be hefty, including up to $100 per paycheck plus 25 percent of the fee charged by the bank. What’s more, under a new law that took effect Jan. 1, 2004, employees can file civil lawsuits on behalf of themselves and others to enforce Labor Code provisions in- stead of leaving it to the labor commissioner. An employee who pursues this route and prevails can collect 25 percent of any penalties recovered and their attorney’s fees.
What to Do Now
Because of this development, it is critical for all employers to ensure their paycheck practices comply with Labor Code Section 212. First, make sure that your employees have a means to cash their paychecks without incurring a fee. For example, you can cash paychecks in-house, negotiate with your bank to drop fees, or agree to pay the fees yourself.
Second, determine whether your bank currently or in the past has charged employees a fee to cash paychecks. If so, it’s a good idea to consult with a lawyer to determine how to correct past problems.
While banks are charging these questionable fees, you can protect yourself by printing the name and branch address of your bank on the face of your payroll checks. Provided your bank will waive any check-cashing fees at this location, this practice will ensure there’s at least one place that won’t charge your employees a check-cashing fee, and you won’t be violating the law. Note that if your bank provides free paycheck cashing at all branches, printing the branch address on the checks isn’t necessary.