Question:

I recently read an article regarding fees charged by banks to cash payroll checks. I am a small employer and I have no control over where my employees choose to cash their payroll checks. Can I be held responsible if a bank charges one of my employees to cash his or her payroll check?

Answer:

Many banks charge fees to cash payroll checks. This practice has garnered some attention because California Labor Code Section 212 requires employers who pay their employees by paycheck to make payroll checks negotiable for the full face value, in cash, on demand, without discount at an established place of business in the state. If the drawee is a bank, the name and address of the bank need not appear on the paycheck unless the bank does not provide free check cashing at all locations. However, if you rely on some established place of business other than the paying bank to cash an employee’s payroll check, the name and address of the establishment must appear on the check. The legal question facing employers when banks charge employees a fee to cash their paychecks is whether the fee charged constitutes an illegal “discount” for which the employer may be held liable under Labor Code Section 212.

A related issue raised by your question is whether the bank can be liable for violating the Labor Code. There is a provision in Section 212(c) which appears to require a bank that issues payroll checks to cash the check without charging a fee. Further complicating this issue is the Federal Bank Act, which permits banks to charge fees for their services. The Federal Bank Act may preempt the California Labor Code.

Legal challenges to Labor Code Section 212 are currently being pursued by banks and employers, so it is unclear whether employers can be held liable for the check cashing fees charged by a bank. Although this is an unsettled area of law, there are certain precautions employers can take in order to comply with Labor Code section 212. Employers should investigate their bank’s policy to determine whether employees, without an account at the bank, can cash their paycheck at the issuing bank without incurring fees. If the bank on which you draw paychecks is only willing to provide free check cashing at a single location, then you must identify the location on the paychecks. Alternatively, if the bank provides free check cashing at all of its locations, then there is no need to identify a branch address on the paycheck.

If your bank is unwilling to provide free check cashing, employers should negotiate to see if the bank will waive the fee. Alternatively, employers may pay the bank’s fee on behalf of the employees. Finally, employers may provide in-house check cashing services to their employees. Ultimately, as long as employees are able to cash their paychecks at some established place of business in the state without discount and know where they can do so, the requirements of Labor Code section 212 are satisfied.
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