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An employer can, theoretically, pay its California employees with checks issued from an out of state bank. However, California's requirements make such a practice impracticable.
Employees cannot be paid wages with just any check. California Labor Code § 212 imposes several requirements when employees are paid by check. The check must be payable:
All of these requirements are obstacles to paying California workers with an out of state check.
- In Cash
- On Demand
- Without Discount
- At an Established Place of Business Within California
It is, however, not automatically illegal to pay wages with out of state checks. The law does not make this requirement, but in reviewing each requirement that is imposed it becomes evident that it is extremely difficult to lawfully pay California employees through an out of state bank.Payable in Cash
Checks must be payable in cash. This means the employee presents the check at a bank and they can receive cash or they can deposit the check into their banking account. This is usually not an issue, but it does mean that an employer cannot pay an employee by giving them a piece of paper that is only redeemable for something other than cash.
Payable on Demand
To be payable "on demand" means that an employee can present their check to a bank and immediately receive cash. As succinctly explained by the court in Rottman v. Hevener (1921) 54 Cal.App. 485:
The words "on demand," when used with reference to the time for payment under an ordinary obligation to pay money, have a plain, distinct, clearly defined, legal, and popular signification, well known to the courts and to the people. When an obligation for the payment of money under a contract such as we have here contains a provision that it is payable "on demand," or "on call" (which is the same thing), the debt is payable presently, that is, it is due immediately; and if not immediately paid the debtor breaches his contract to pay, and the statute of limitations at once begins running in his favor.
Similarly, Commercial Code Sections 3108 and 3109 state that a promise is "payable on demand" if it is "payable at the will of the holder," and that if an instrument does not state any time of payment then it is payable on demand. A note is dishonored if it is payable on demand and not paid on the day it is presented.
A check, by definition, is payable on demand. (Commercial Code § 3104(f) ("Check" means (1) a draft, other than a documentary draft, payable on demand and drawn on a bank ....))
This means an employee must be able to present their check and immediately receive cash for the amount of the check.
Out of state checks, and bank concern about fraud, prevent many out of state checks from being paid in this manner. If an employee wants to deposit the check and to have their account credited for the amount of the check, they will usually have a waiting period until the check clears. But the law does not require that an employee be able to deposit their payroll check without a hold - the law demands more. The employee must be able to present their check and receive cash, irrespective of whether the check is deposited into their account.
Lawzilla Cross-References: Expense Reimbursement and Direct Deposit - An employer cannot require that an employee have a checking account, unless the employer pays for the account.
To further explore this issue, Lawzilla sent counsel to its favorite bank, Washington Mutual, to discuss the possibilities of having an out of state check cashed. The general rule is that this is unlikely to occur. There is too much fraud, and the possibility for fraud, for someone to walk into the bank with an out of state check and walk out with cash. However, this is not an absolute, which is why it is not automatically illegal to pay a worker with an out of state check.
If an employee has been a long-time customer at the bank, has not had overdrafts, and has sufficient funds in their account, an out of state check can be cashed. Washington Mutual indicated (at least the branch that was visited) that it would cash an out of state check for a good customer in the amount of the check if the customer had more than that in their account. Even then, approval would be by a manager and not by a teller.
Since these facts are personal to the employee, and will differ from employee to employee, and even for one employee over time, a business cannot assume that a bank will be kind enough to allow a person to cash a check. This is a reason why, discussed later, the employer must ascertain where employees can cash checks in California and write on the check the address and name of the business where this can occur.Payable Without Discount
To be payable without discount means that the check can be cashed without a check cashing fee being imposed upon the employee. Some banks have a reputation for imposing such fees upon non-customers - Bank of America and Wells Fargo. Other banks do not charge a fee - Washington Mutual.
This can be a huge, and hidden liability for many businesses. Where an employer banks may cause them to be sued! In April 2004 class action lawsuits were filed in California by two employers against Wells Fargo and Bank of America demanding that they stop charging fees for cashing payroll checks and demanding that they refund all fees. This is an interesting preemptive strategy by the employers because it is they who have liability to their employees for issuing payroll checks that do not comply with the law. Presumably, if the employers prevail against the banks, the employers may have established their own liability and may be subject to employee lawsuits.
[Karis House v. Bank of America, filed April 21, 2004; Ability Answering-Paging Service v. Wells Fargo Bank, filed April 23, 2004.]Payable at an Established Business Within California
Section 212 requires that the check by payable at an established business within California. An employee cannot be told to cash their check in Nevada.
Additionally, the statute requires that the name and address of the established business within California appear on the check. This is so the employee knows where they can go to cash their check. If the "drawee" is a bank, the bank's address does not need to appear as the employee can go to any branch. Generally, the drawee for checks is a bank.
This is another problem when using an out of state bank. Unless the bank has locations within California, the employer will need to (1) locate an established business within California where the payroll checks can be cashed, and (2) write this address on each check. There had better be a good reason to use an out of state bank to go to this bother!
Labor Code section 212
(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 to be 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.(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.
(2) Any scrip, coupon, cards, or other thing redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money.
(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.