Request,Application: CARNEISH BUNTON, et al VS. SEPHORA USA, INC. et al

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SUPERIOR COURT OF CALIFORNIA
COUNTY OF SAN FRANCISCO

Document Scanning Lead Sheet
Jun-29-2012 3:12 pm

Case Number: CGC-10-497025
Filing Date: Jun-29-2012 3:12
Filed by: WESLEY G. RAMIREZ
Juke Box: 001 Image: 03671862
GENERIC CIVIL FILING (NO FEE)

CARNEISH BUNTON, et al VS. SEPHORA USA, INC. et al

001003671862

Instructions:
Please place this sheet on top of the document to be scanned.ORIGINAL ©

1

BR WN

wn

ANDREW R. LIVINGSTON (STATE BAR NO. 148646)

BROOKE D. ARENA (STATE BAR NO. 238836)

AUBRY R. HOLLAND (STATE BAR NO. 259828) ~

ORRICK, HERRINGTON & SUTCLIFFE LLP

The Orrick Building

405 Howard Street

San Francisco, CA 94105-2669
Telephone: +1-415-773-5700
Facsimile: — +1-415-773-5759

Email: alivingston@orrick.com
Email: barena@orrick.com
Email: aholland@orrick.com

Attorneys for Defendant
SEPHORA USA, INC.

Superior Gaunt Mi
County of San Franelsco

WUN 29 2012

CLERK OF THE COURT
BY.

Deputy Cler.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SAN FRANCISCO

CARNEISH BUNTON, on behalf of herself
and all others similarly situated,

Plaintiffs,
v.

SEPHORA USA, INC. and Does 1 through
50, inclusive,

Defendants.

CASE NO. CGC-10-497025

DEFENDANT’S REQUEST FOR
JUDICIAL NOTICE IN SUPPORT OF
OPPOSITION TO MOTION FOR

CLASS CERTIFICATION

Date: TBD

Time: TBD

Dept: 304

Judge: Hon. Richard A. Kramer

DEFENDANT’S REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF OPPOSITION TO MOTION FOR CLASS CERT.
(CASE NO. CGC-10-497025)YN HD nw FF WN

Pursuant to California Evidence Code § 452, Defendant Sephora USA, Inc. (“Sephora”)
hereby requests that the Court take judicial notice of and consider as evidence in support of
Defendant Sephora USA, Inc.’s Opposition to Plaintiff's Motion for Class Certification the

following government documents:

1. DLSE Opinion Letter No. 2006.07.06 (“Electronic Delivery of Wage
Statements”). A copy of DLSE Opinion Letter No. 2006.07.06 is attached hereto
as Exhibit 1.

2. DLSE Opinion Letter No. 2008.07.07 (“Payroll/Debit Cards — Means of
Payment of Wages Labor Code §§ 212 and 213.”) A copy of the DLSE Opinion
Letter No. 2008.07.07 is attached hereto as Exhibit 2.

3. DLSE Enforcement Policies and Interpretations Manual (2002), §§ 46.6.4
(“Changing Uniforms or Washing Up at Work”); 49.1.2 (“Items of
Compensation Included in Calculating Regular Rate of Pay”); 49.1.2.4
(“Payments That Are To Be Excluded in Determining ‘Regular Rate’”);

49.2.4 (“Computing Regular Rate and Overtime on a Bonus”). A copy of Sections
46.6.4, 49.1.2, 49.1.2.4, and 49.2.4 of the DLSE Enforcement Policies and
Interpretations Manual is attached hereto as Exhibit 3.

4, DLSE Information Sheet regarding “Minimum Wage” (January 2011). A copy of
the DLSE Information Sheet regarding “Minimum Wage” is attached hereto as
Exhibit 4.

Exhibits 1 through 4 are true and correct copies of documents prepared by the Division of

Labor Standards Enforcement, a California state agency, and are properly subject to judicial
notice because they constitute “[o]fficial acts of the legislative, executive and judicial
departments of...any state of the United States.” Cal. Evid. Code § 452(c); see Bell v. Farmers
Ins. Exchange, 115 Cal. App. 4th 715, 735 n.7 (1999) (taking judicial notice of DLSE opinion
letters); Hestand v. Saunders, 85 Cal. App. 4th 334, 338 n.5 (2000) (court took judicial notice of
the minutes of public meetings of the Industrial Welfare Commission and various public
documents issued by that agency); ABC Acceptance v. Delby, 150 Cal. App. 2d Supp. 826, 828
(1957) (court took judicial notice of memorandum of the Labor Commissioner disapproving the
use of promissory notes to circumvent the employment agency law). For the foregoing reasons,
Ml

Ml

Ml

DEFENDANT'S REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF OPPOSITION TO MOTION FOR CLASS CERT.
(CASE NO. CGC-10-497025)Bw N

Sephora respectfully requests that this Court take judicial notice of Exhibits 1 through 4 attached

hereto.

Dated: June 29, 2012 ANDREW R. LIVINGSTON
BROOKE D. ARENA
AUBRY R. HOLLAND
Orrick, Herrington & Sutcliffe LLP

QL SL, £06,

ALY

«A R. Holland 7
rmeys for Defendant
Sephora USA, Inc.

-2-

DEFENDANT’S REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF OPPOSITION TO MOTION FOR CLASS CERT.
(CASE NO. CGC-10-497025)STATE OF CALIFORNIA Arnold Schwarzenegger, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS

Headquarters

P.O. Box 420603

San Francisco, CA 94142
Tel: (415) 703-4810

Fax: (415) 703-4807

Robert A. Jones

Acting State Labor Commissioner

and Chief Counsel

Division of Labor Standards Enforcement

July 6, 2006

Colette Wolf

Boise Cascade LLC

Legal Department

11111 West Jefferson Street
P.O. Box 50

Boise, Id. 83728

Re: Electronic Itemized Wage Statements

Dear Ms. Wolf:

Thank you for your inquiry concerning the application of Labor Code section 226(a). Specifically,
you have requested an opinion as to whether under certain circumstances an employer’s obligation to
provide an employee with a “wage statement” may be met by providing an employee with such a record
in electronic form, as an alternative to a “hard copy” paper document.

The requirement for an employer to provide employees with wage statements is contained in
Labor Code section 226(a). Section 226(a) provides:

Every employer shall, semimonthly or at the time of each payment of
wages, furnish each of his or her employees, either as a detachable part of
the check, draft, or voucher paying the employee's wages, or separately
when wages are paid by personal check or cash, an accurate itemized
statement in writing showing (1) gross wages earned, (2) total hours
worked by the employee, except for any employee whose compensation
is solely based on a salary and who is exempt from payment of overtime
under subdivision (a) of Section 515 or an applicable order of the
Industrial Welfare Commission, (3) the number of piece-rate units earned
and any applicable piece rate if

2006.07.06the employee is paid on a piece-rate basis, (4) all deductions,

provided that all deductions made on written orders of the employee may
be aggregated and shown as one item, (5) net wages earned, (6) the
inclusive dates of the period for which the employee is paid, (7) the name
of the employee and his or her social security number, except that by
January 1, 2008, only the last four digits of his or her social security
number or an employee identification number other than a social security
number may be shown on the itemized statement, (8) the name and
address of the legal entity that is the employer, and (9) all applicable
hourly rates’ in effect during the pay period and the corresponding
number of hours worked at each hourly rate by the employee. The
deductions made from payments of wages shall be recorded in ink or
other indelible form, properly dated, showing the month, day, and year,
and a copy of the statement or a record of the deductions shall be kept on
file by the employer for at least three years at the place of employment or
at a central location within the State of California.

The purpose of the wage statement requirement is to provide transparency as to the calculation of
wages. A complying wage statement accurately reports most of the information necessary for an
employee to verify if he or she is being properly paid in accordance with the law and that deductions from
wages are proper.' Section 226(a) makes it possible for an employee to retain a copy of his/her own pay
records which are not subject to alteration.

Labor Code section 226(a) indicates that a wage statement may be in the form of an “accurate
itemized statement in writing” when the employee is paid by personal check or cash. Labor Code section
8 states in pertinent part: “Writing includes any form of recorded message capable of comprehension by
ordinary visual means.” As an electronically stored wage statement which is accessible by an employee
may be read on a screen or printed and read as a hard copy, it appears to qualify as a “statement in
writing.”

Section 226(a) provides that an employee being paid with a payroll check be provided a wage
statement as a “detachable part of the check.” While the reference to “detachable part of the check” is
susceptible to an interpretation that a “hard copy” may be required, in the context of the entire subsection
it appears to allow for the continued use of the convenient and traditional “pay stub” alternative to a
separate statement in writing.

The apparent intent of both forms of wage statements described in Section 226(a) is to allow
employees to maintain their own records of wages earned, deductions, and pay received. The Division in
recent years has sought to harmonize the “detachable part of the check” provision and the “accurate
itemized statement in writing” provision of Labor Code section 226(a) by allowing for electronic wage
statements so long as each employee retains the right to elect to receive a written paper stub or record
and that those who are provided with electronic wage statements retain the ability to easily access the
information and convert the electronic statements into hard copies at

' Whether an employee is properly classified as exempt from the overtime pay requirements of Labor Code section 510
and the IWC Orders is not susceptible to verification from review of the wage statement alone. However, a wage
statement may reveal that an employee is non-exempt if it shows that an employee is paid a salary of less than twice the
minimum wage calculated on the basis of a 40 hour week. See Labor Code section 515(a).

2 2006.07.06no expense to the employee. Additionally, the Division has indicated that the record keeping requirements
of Labor Code section 226 and 1174 must be adhered to and the pay records must be retained by the
employer for a period of at least three years and be accessible by employees and former employees. Any
electronic wage statement system must incorporate proper safeguards that ensure the confidentiality of the
employee’s confidential information.

The system envisioned by your client appears to meet the concerns outlined above. Your client
indicates that its electronic wage statement procedures will incorporate the following features:

1. An employee may elect to receive paper wage statements at any time;

2. The wage statements will contain all information required under Labor Code section
226(a) and will be available on a secure website no later than pay day;

3. Access to the website will be controlled by unique employee identification numbers and
confidential personal identification numbers (PINs). The website will be protected by a
firewall and is expected to be available at all times with the exception of downtime caused
by system errors or maintenance requirements;

4. Employees will be able to access their records through their own personal computers or
by company provided computers. Computer terminals will be available to all employees
for accessing these records at work.

5. Employees will be able to print copies of their electronic wage statements at work on
printers that are in close proximity to the computer or computer terminal. There will be no
charge to the employee for accessing their records or printing them out. Employees may
also access their records over the internet and save it electronically and/or print it on their
own printer.

6. Wage statements will be maintained electronically for at least three years and will continue
to be available to active employees for that entire time. Former employees will be
provided paper copies at no charge upon request.

There is no requirement for employers to obtain approval from the Division before implementing
an electronic wage statement system. Indeed the Legislature has not established such a duty on the part of
the DLSE or provided DLSE with such administrative authority. As with most provisions of the Labor
Code employers are required to comply without any formal action by the Labor Commissioner.’ Due to
both changes in the law and confusion that has resulted from previous Opinion Letters 1999.07.19 and
2002.12.04, this letter supersedes them and they are withdrawn.

2 Some provisions of the Labor Code and Wage Orders require prior Labor Commissioner action in the form of issuance
ofa registration, granting of approval, or provision of consent. For example, there are registration requirements in the
garment, car wash, and farm labor industries which require employers to obtain a registration from the Labor
Commissioner prior to employing workers. Similarly, employers must obtain the “consent” of the Labor Commissioner
before a minor may be employed in the entertainment industry. Employers also may apply to the Labor Commissioner
for exemptions to certain sections of the Orders of the Industrial Welfare Commission. [These examples are not
intended as an exhaustive list of such provisions.]

3 2006.07.06This opinion letter sets forth an interpretation of Labor Code section 226(a) which is utilized in our
administrative enforcement efforts of the wage statement requirement. This interpretation is based on our
understanding as to the current state of the law and, of course, is subject to subsequent interpretations by
the courts and/or action of the Legislature. Employers are advised that while the courts may find this
opinion of the enforcement agency to be persuasive authority, they are not required to follow this
interpretation and that compliance with the guidelines suggested herein do not establish a “safe harbor” in
actions brought by private parties under auspices of the Labor Code Private Attomeys General Act of
2004 (PAGA) or other private enforcement actions.

This opinion is based exclusively on the facts and circumstances described in your request and is
given based on your representation, express or implied, that you have provided a full and fair description
ofall the facts and circumstances that would be pertinent to our consideration of the questions presented.
Existence of any other factual or historical background not contained in your letter might require a
conclusion different from the one expressed herein. You have represented that this opinion is not sought
by a party to pending private litigation concerning the issue addressed herein. You have also represented
that this opinion is not sought in connection with an investigation or litigation between a client or firm and
the Division of Labor Standards Enforcement.

Thank you for your attention to the requirements of the California wage and hour laws and your
inquiry.
Very Truly Yours,
/si
Robert A. Jones

Chief Counsel and Acting
Labor Commissioner

4 2006.07.06Boise Cascade, L.L.C.

Legal Department

1711 West Jefferson Street PO Box 50 Boise, ID 83728
T 208 384 4805 F 208 384 4961

CydniWaldner@BC.com BOISE

Cydni J. Waldner
Associate General Counsel

October 31, 2005

Mr. Robert Jones

Chief Counsel

Division of Labor Standards Enforcement
P.O. Box 420603

San Francisco, CA 94142

Subject: ELECTRONIC DELIVERY OF WAGE STATEMENTS

Dear Mr. Jones:

This letter is a request on behalf of Boise Cascade, L.L.C. to institute a program of
electronic delivery of wage statements in California.

California Labor Code §226 provides in part:

“(a) Every employer shall, semimonthly or at the time of each payment of wages,
furnish each of his or her employees, either as a detachable part of the check,
draft, or voucher paying the employee's wages, or separately when wages are
paid by personal check or cash, an accurate itemized statement in writing
showing (1) gross wages earned, (2) total hours worked by the employee, except
for any employee whose compensation is solely based on a salary and who is
exempt from payment of overtime under subdivision (a) of Section 515 or any
applicable order of the Industrial Welfare Commission, (3) the number of piece-
rate units earned and any applicable piece rate if the employee is paid on a
piece-rate basis, (4) all deductions, provided that all deductions made on written
orders of the employee may be aggregated and shown as one item, (5) net
wages earned, (6) the inclusive dates of the period for which the employee is
paid, (7) the name of the employee and his or her social security number, except
that by January 1, 2008, only the last four digits of his or her social security
number or an employee identification number other than a social security number
may be shown on the itemized statement, (8) the name and address of the legal
entity that is the employer, and (9) all applicable hourly rates in effect during the
pay period and the corresponding number of hours worked at each hourly rate by
the employee. The deductions made from payments of wages shall be recorded

{W:WDOX\HR\177446:0000:00266740:}

2006.07.06Page 2
October 31, 2005

in ink or other indelible form, properly dated, showing the month, day, and year,
and a copy of the statement or a record of the deductions shall be kept on file by
the employer for at least three years at the place of employment or at a central
location within the State of California.

“(b) An employer that is required by this code or any regulation adopted
pursuant to this code to keep the information required by subdivision (a) shall
afford current and former employees the right to inspect or copy the records
pertaining to that current or former employee, upon reasonable request to the
employer. The employer may take reasonable steps to assure the identity of a
current or former employee. If the employer provides copies of the records, the
actual cost of reproduction may be charged to the current or former employee.”

Although the statute does not address electronic delivery, it is Boise Cascade, L.L.C.’s
understanding, based on Department of Labor Standards Enforcement (DLSE) Opinion
Letters 1999.07.19 and 2002.12.04, that electronic delivery of the wage statement
required under Labor Code §226 is permissible under certain conditions, and further,
that any employer proposing to use electronic means to deliver such statement must
submit its proposed program to the DLSE for specific approval before implementing its
program in California.

Boise Cascade, L.L.C. has developed a program for electronic delivery of wage
statements and requests DLSE approval for implementing this program in California.
The specifics of Boise Cascade, L.L.C.’s program are explained below.

4. Employees who voluntarily enroll in direct deposit will be enrolled for electronic
delivery of wage statements unless they request to receive paper statements. Once
an employee begins receiving wage statements electronically, he or she may
request to receive paper wage statements at any time. Initially, the electronic
delivery program will be limited to salaried employees. In the near future, the
company anticipates making the program available to hourly employees as well.

2. Wage statements will contain all information required under Labor Code §226(a) and
will be available on a secure website up to 48 hours prior to the actual payday, but in
all cases no later than payday.

3. Access to the website is controlled by unique employee identification numbers and
confidential personal identification numbers (PINs). The website is managed by
Boise Cascade, L.L.C. and is protected by a firewall. The website is expected to be
available at all times except for downtime caused by system errors or maintenance
requirements.

{WAWDOXIHR\177446:0000:00266740:}

2006.07.06Page 3
October 31, 2005

4. Employees who have a company-provided personal computer with internet access
will be able to use that computer to connect to the website. Computer terminals able
to connect to the website are also available at the location. Employees who have
home computers with internet access may also access the website from home using
the web address provided by the company, their employee identification number and
their PIN.

5. Employees who access the wage statement from a company-provided personal
computer or computer terminal may print the statement to a network printer located
in reasonably close proximity to the computer or terminal. There is no charge to the
employee to print the wage statement. Employees who access the wage statement
from a home computer may print the statement on their home printer or download
the statement to their home computer and save it electronically.

6. Wage statements provided electronically will be maintained for the legally required
period of time and will continue to be available on the website for at least three
years, provided that only active employees will have access to the website.
Terminated employees may request paper copies of wage statements which will be
provided at no charge.

Please advise whether Boise Cascade, L.L.C.'s proposed program for electronic
delivery of wage statements is approved for implementation in Califomia. If you have
any questions or need any additional information in order to respond to this request,
please do not hesitate to contact me. We appreciate your attention to this request.

Regards,

4 J. Waldner

CJW/cw

{WAWDOXIHR\177446:0000:00266740:}

2006.07.06STATE OF CALIFORNIA Arnold Schwarzenegger, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS

DIVISION OF LABOR STANDARDS ENFORCEMENT
485 Golden Gate Avenue, 9" Floor

San Francisco, California 94102

(415) 703-4863

(415) 703-4806 fax

ANGELA BRADSTREET, STATE LABOR COMMISSIONER

ROBERT R, ROGINSON
Chief Counsel

July 7, 2008

Carl Morris

National Debit Card Manager
American EPay, Inc.

8420 W. Bryn Mawr Ave., Suite 510
Chicago, Illinois 60631

Daniel P, Schwallie
Hewitt Associates, LLC
Crown Center

5005 Rockside Road
Independence, Ohio 44131

Re: Payroll/Debit Cards - Payment of Wages Labor Code $§ 212 and 213
Dear Messrs. Morris & Schwallie:

This letter is in response to your respective letters requesting an opinion from this office on
the question whether the use of “payroll debit cards” (American EPay) and “paycards” (Hewitt
Associates) through your respective company’s payroll distribution services complies with
California law, and specifically Labor Code § 212 which governs the manner of payment for
wages.

In both your respective letter requests and subsequent conversations with our office, the
wage payment methods described use of respective payroll cards which are issued pursuant to
agreements between your companies and national banks.' Employers (clients‘of your services)
deposit employee payroll using a direct deposit method into individual employee accounts at a

' The term “payroll card” will be used to describe both types of cards used by the companies discussed herein. ‘The
payroll card is a type of stored value (or prepaid) card which contains or represents an amount of pre-loaded value.
Examples of prepaid cards include gift cards, phone cards, travel cards. Stored value cards can be structured under
either a closed system (accepted at a single merchant or entity) or an open system (accepted by multiple merchants or
entities), the latter which requires a payment systems network for collecting and processing, Stored value cards can be
structured to function like debit cards, A debit cards is a payment card that debits a designated bank account upon
settlement of a transaction (e.g. to withdraw or transfer funds such as in retail purchases, ATM. withdrawal) which is
authorized by the user by signature or by entering a personal identification number (PIN). Payroll cards are usually
proprietary but may also be “nationally branded” with a Visa or MasterCard brand logo which allows not only ATM or
specific merchant withdrawals but also allows for purchasing and receiving cash from numerous merchants or other
entities like a traditional debit card. The payroll cards described in this opinion are open system, branded cards
utilizing debit card features.

2008.07.07Carl Morris

Daniel P. Schwallie
July 7, 2008

Page 2

bank which is an FDIC member. Employees are provided a plastic card which is magnetically or
electronically encoded with account information which allows employees access to funds from
their respective accounts. On the scheduled pay day, the employee has immediate access to their
full wages (one transaction without fee per payroll period). Employees are not required to use
your pay distribution programs and may elect to receive their payroll by direct deposit in an
account at their own bank or credit union.

Your letters described the cards as a convenient and prompt means of access to an
employee’s full wages due and payable on a scheduled pay day. Under the programs offered by the
respective companies, the payroll card may be used at any VISA-member financial institution.
While there are program differences between the two payroll card systems, both have the above-
described major features in common.

This analysis first states the major statutory provisions for payment of wages and this
agency’s previous interpretations regarding earlier similar programs followed by a discussion of
recent developments in federal regulation of payroll card accounts. The analysis will then analyze
the described programs under the relevant wage payment provisions.

Requirements Regarding the Manner of Payment of Wages

California Labor Code § 212 states, in relevant part:

(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.

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

A plain reading of Labor Code § 212(a) establishes a broad prohibition against payment of
wages by (non-cash) methods using instruments unless such instrument complies with the

2008.07.07Carl Morris

Daniel P. Schwallie
July 7, 2008

Page 3

conditions stated in subsection (a)(1),’ and further, is not “[aJny scrip, coupon, cards, or other thing
redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money”
as proscribed in subsection (a)(2).

Labor Code § 213 states specific limitations on §212 and provides, inter alia,

Nothing contained in Section 212 shall:

(d) Prohibit an employer from depositing wages due or to become due or an
advance on wages to be earned in an account in any bank, savings and loan
association, or credit union of the employee’s choice with a place of
business in this state, provided that the employee has voluntarily authorized
that deposit. If an employer discharges an employee or the employee quits,
the employer may pay the wages earned and unpaid at the time the employee
is discharged or quits by making a deposit authorized pursuant to this
subdivision, provided that the employer complies with the provisions of this
article relating to the payment of wages upon termination or quitting of
employment.

DLSE previously opined that a program conceptually similar to the instant proposals
complied with the requirements of the Labor Code. (O.L, 1994.02.03-1) In that opinion letter, the
Citibank PayTM service was described as an electronic alternative for payment of wages to
employees where employees voluntarily participated in the wage payment program. Under the
program, an employer offers the service to its employees who apply to open a PayTM account.
Upon acceptance of the account application by Citibank, the employee would be issued a PayTM
card and the employee’s pay would be directly deposited to the employee’s account. Thereafter, the
employee can access his or her funds through use of the pay card using a personal identification
number (PIN) at any of the hundreds of ATMs and point-of-sale (POS) locations.

The 1994 opinion letter analyzed the Citibank program by reading Labor Code § 213 in
light of the provisions of Labor Code § 212. Significantly, the letter stated that PayTM card
“would be the instrument which is negotiable and payable in cash on demand, without discount at
an established place of business (i.e., ATMs)...” ((O.L. 1994.02.03-1, p. 2) The letter concluded
that, subject to Citibank’s waiver of any right to extraterritorial service for subpoenas for bank
records regarding the accounts, DLSE would be able to opine that the service “complies with
California law.” (Jd, at p.3) Similarly, DLSE previously opined that a payroll service program

—_—

2 DLSE has historically viewed the wage payment laws as requiring payment of wages in cash or by instrument
negotiable in cash without discount upon demand. (DLSE Enforcement Policies and Interpretations Manual, § 9.1.1)
The Labor Code does not specifically define the terms “instrument” or “negotiable” which are terms used in Labor
Code § 212(a). The ordinary meaning of the word “instrument” is “a writing or document” (See Black’s Law
Dictionary, 5" ed., 1979, p. 720) The word “negotiable” means “[I]egally capable of being transferred by endorsement
or delivery. Usually said of checks and notes and sometimes of stocks and bearer bonds.” (/d., p. 933), or, “legally
transferable to another by endorsement or by proper delivery (said of promissory notes, checks, etc.)...” (Webster's
New World College Dictionary, 4” ed, 2005, p. 964).

2008.07.07Carl Morris

Daniel P. Schwallie
July 7, 2008

Page 4

offered to companies employing over-the-road truck drivers which allows all or any portion of
wages to be transferred by direct deposit to the drivers bank account and such wages could be
distributed to the driver on the road (both through ATM machines or drafts without incurring
charge) met the requirements of Labor Code § 212(a). (O.L. 1997.10.21)

While the conclusions of the described opinion letters appear appropriate, clarification of
the analysis is warranted given the language in both Labor Code §§ 212 and 213 as well as
developments in the law and practice regarding the use of payroll card programs,

Developments in Payroll Card Regulation

The technology explosion in the last 20 years has often outpaced the ability of federal and
state governments to keep up with private industry advances in conducting business. Although the
use of electronic “payroll cards” has been around for some time (as illustrated by the above
described opinion letters), it has only recently been expressly regulated under specific federal law.

The federal Electronic Fund Transfer Act (EFTA), 15 U.S.C. § 1693 ct seq., enacted in
1978, provided a basic framework establishing rights, liabilities and responsibilities of participants
and consumers involved in electronic fund transfer systems and financial institutions that offer
these services, (12 CFR § 205.1(b)) Although EFTA was enacted many years ago, the internet has
drastically increased the number of electronic transactions and importance of the Act.

EFTA is implemented and administered by the Board of Governors of the Federal Reserve
System (FRB) through “Regulation E” (12 CFR Part 205) which has a primary objective of
protecting individual consumers engaging in electronic fund transfers. (12 CFR 205.1(b))
Regulation E broadly defines an “electronic fund transfer” as “any transfer of funds that is initiated
through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering,
instructing, or authorizing a financial institution to debit or credit a consumer’s account.” (12 CFR
§ 205.3(b)). The most common types of covered transactions are those involving debit cards,
direct deposits, ATM transfers, and preauthorized debits from a consumer’s bank account, and
point-of-sale transfers, (/d., italics added) Regulation E provides for initial and subsequent
disclosures, issuance of access devices, liabilities of consumer for unauthorized transfers, changes
in terms and required notice, receipts/statements, pre-authorized transfers, error resolution
procedures, and enforcement by federal agencies.

Prior to July 2007, EFTA covered only electronic fund transfers in and out of a consumer's
personal bank account and not to a business account. Effective July 1, 2007, the FRB expressly
made electronic “payroll cards” subject to the EFTA. A covered account now includes a “‘payroll
card account’ which is an account that is directly or indirectly established through an employer and
to which electronic fund transfers of the consumer’s wages, salary, or other employee
compensation (such as commissions) are made on a recurring basis, whether the account is
operated or managed by the employer, a third party payroll processor, a depository institution or
any other person...” (12 CFR § 205.2(b)(2))

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Daniel P. Schwallie
July 7, 2008

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It is evident that the payroll card and its electronic-based means of accessing and
transferring funds is now clearly aligned with other electronic transaction or payment methods such
as debit cards and direct deposits covered under FRB’s Regulation E requirements. Moreover, the
activities regulated under EFTA are distinguishable from the rights, obligations, and remedies
available for negotiable instruments which are largely governed by Article 3-Negotiable
Instruments of the Uniform Commercial Code qucc)?

It is clear from the language in Labor Code § 213(d) that the Legislature specifically
authorized wage payments using direct deposit and prescribed the conditions for such payment
method, and further, that Labor Code § 212 cannot be read to prohibit such wage payment method.
Accordingly, the conditions for payment of wages using a negotiable instrument have been viewed
as independent of the conditions for payment by direct deposit in financial institutions. (See O.L.
1996.11.12 [payment by check delivered directly to the worker is different from a direct deposit in
a banking-type institution which is why the Legislature provided one rule for one method and
another rule for the second].)

The payroll card programs utilize both a direct deposit of wages under an employer
sponsored service which is beyond the traditional payment into an employee’s personal bank
account and a means of access to those wages using an electronic card. Based upon the described
developments in federal regulation of payroll cards used to pay an employee’s wages using direct
deposit as a component of a payroll card system and, in view of the distinction between conditions
for wage payments by negotiable instrument and direct deposit treated differently under both
general laws and wage payment provisions, it is appropriate to first view the subject programs for
compliance with Labor Code § 213(d) because the payroll card uses a method of wage payment
involving direct deposit.

Direct Deposit Under Labor Code § 213(d)

As previously stated, Labor Code § 213(d) expressly authorizes an employer to deposit
“wages due or to become due or an advance on wages to be earned in an account in any bank,
savings and loan association, or credit union of the employee’s choice with a place of business in
this state, provided that the employee has voluntarily authorized that deposit.”

3 We could find no authority definitively stating that a “payroll card” or “debit card” is a “negotiable instrument” as
defined under Article 3 — Negotiable Instruments in the UCC (codified in California Commercial Code §§ 3101 et
seq.) A negotiable instrument is “an unconditional promise or order to pay a fixed amount of money, with or without
interest or other charges described in the promise or order if it is all of the following; (1) Is payable to bearer or to
order at the time it is issued or first comes into the possession of a holder. (2) Is payable on demand or at a definite
time. (3) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act
in addition to the payment of money, ...” (Commercial Code §3104(a)) One federal agency has opined that stored
value cards (of which payroll cards are a subspecies) are not negotiable instruments since they do not satisfy the
definitional requirements under the UCC, (FDIC General Counsel’s Opinion No. 8, “Stored Value Cards,” 61 Fed Reg.
40490, Aug. 2, 1996 [determining that some stored value systems are “deposits” within the meaning of the Federal
Deposit Insurance Act and therefore assessable and qualify for deposit insurance].)

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Daniel P. Schwallie

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Employee choice is thus a fundamental condition for payment methods utilizing direct
deposits under California wage payment law. Also, the optional nature of an employee’s
participation is further mandated under FRB’s Regulation E which states: “No financial institution
or other person may require a consumer to establish an account for receipt of electronic fund
transfers with a particular institution as a condition of employment or receipt of governmental
benefit.” (12 CFR § 205.10(e); italics added)

In both described programs, the employer directly deposits payroll into an individual
employee’s account established at the program bank. Employees continue to have the option of
having their pay directly deposited into an account of their choosing at some other financial
institution (bank, savings and loan association, or credit union). Since an employee’s participation
in the payroll card program is optional and provided that the employee has voluntarily and
specifically authorized the deposit, the payroll card programs simply provide another alternative
for employees to receive their wage payments by direct deposit. Thus, the two programs
sufficiently satisfy the voluntary requirement in Labor Code § 21 3(a).4

Additionally, Labor Code § 213(d) requires that the deposit be made in any bank, savings,
and loan association, or credit union “with a place of business in this state.” By its terms, the
requirement does not mandate that the deposit be made in California, but simply that the financial
institution has a place of business in California, The terms “place of business” is not specifically
defined; thus, as with any interpretation of a statutory or regulatory provision, the language must be
read as a whole giving words their ordinary meaning. (Fitch v. Select Products Co. (2005) 36
Cal.4th 812, 818) The ordinary meaning of the word “place” in its noun form includes a “building
or space devoted to a special purpose [a place of amusement]” (Webster’s New World College
Dictionary, 4" ed., 2005, p. 1099) The noun form of the word “business” includes “the buying and
selling of commodities and services; commerce; trade...a commercial or industrial establishment;
store, factory, etc....the trade or patronage of customers”. (Webster’s New World College
Dictionary, 4" ed., 2005, p. 1099) When read together, the ordinary meaning of “place of
business” denotes a location such as a building, space, or establishment devoted to the purpose or
use of conducting one’s commerce, trade or patronage of customers.

Given the ordinary meaning of “place of business” as discussed above, an employer’s place
of business may not be on property it owns or controls and should not be interpreted as limited to
such locations. Business is now conducted in many different forms which vary extensively beyond
the traditional fixed location. It follows from this recognition and the inherent electronic nature of
the bank’s direct deposit transaction involving the transfer of pay between a California employer to
the bank which maintains an account for the employee, the presence of a branch office of the bank
in California is not determinative for establishing a “place of business” for purposes of performing

4 Since payroll card accounts are now subject to the FRB’s Regulation E, employees are now protected under the
federal EFTA for electronic transactions into and out of the account to the same extent as any other consumer using
direct deposits at financial institutions which include, but is not limited to, initial and subsequent disclosure
requirements, limits on liability, error resolution, changes in terms and required notice, receipts/statements, pre-
authorized transfers, etc., as previously described.

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Daniel P. Schwallie
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direct deposit under Labor Code § 213(d). The bank utilizes electronic fund transfers to both
collect the wage deposit from the employer and provide employee access to and actual receipt of
cash through VISA-member financial institutions and ATMs throughout California, The banks
thus have a sufficient presence of their banking business in California for purposes of Labor Code
§ 213(d) based upon the banks use of established electronic payment networks for ultimate receipt
of wages by California workers at locations in California.

It deserves noting that the two banks in the subject requests (National City and JP Morgan
Chase) are “national banks” which are part of the national banking system and regulated by the
Office of the Comptroller (OCC) in the U.S. Department of the Treasury. As the administrator of
national banks, OCC charters, regulates and supervises all national banks and is charged with
ensuring a stable and competitive national banking system. Under OCC regulation, a national
bank shall not be considered located in a State solely because it physically maintains technology,
such as a server, in that state, or because bank products or services are accessed through electronic
means by customers located in the state. (12 CFR § 7.5008) However, our above analysis for
determining “place of business” is made for purposes of California’s wage payment provision in
Labor Code § 213(d) only, and does not determine that the subject banks are “located” in the State
for federal regulatory purposes or any other purpose.

Labor Code § 212 and Other Wage Laws Requiring Prompt and Full Payment of Wages

The compliance of the direct deposit aspect of the payroll card program under Labor Code
§ 213(d), however, only partially resolves compliance with the wage payment laws. Following
deposit of wages into the payroll card account, another component part of the payment program—
namely effective access to the wage funds using the payroll card which results in the employees
actually obtaining and using such funds must be determined under other wage payment provisions.

5 DLSE recognizes that the OCC has determined that national banks offering payroll cards and other pre-paid payment
services are part of the business of banking activities authorized for national banks. (See, OCC Advisory Letter, AL-
2004). Also, a national bank is expressly authorized to “disburse to an employee of a customer payroll funds deposited
with the bank by the customer, and further may, disburse those funds by direct payment to the employee, by crediting,
an account in the employee’s name at the disbursing bank, or by forwarding funds to another institution in which an
employee maintains an account.” (12 CFR § 7.1011) Federal regulations further state:

(c) State laws, As a general rule, and except as expressly provided by Federal law, State law is inapplicable to
a national bank’s conduct of an authorized activity through electronic means or facilities if the State law, as
applied to the activity, would be preempted pursuant to traditional principles of Federal preemption derived
fiom the Supremacy Clause of the U.S. Constitution and applicable judicial precedent. Accordingly, State
laws that stand as an obstacle to the ability of national banks to exercise uniformly their Federal authorized
powers through electronic means or facilities, are not applicable to national banks. (12 CFR § 7.5002(c))

Our analysis of the banks’ place of place of business for wage payment purposes does not stand as an obstacle to the

banks’ abilities to perform federally authorized activities through electronic means or facilities. Rather, our
interpretation is compatible with the banks’ ability to conduct such activities.

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Daniel P. Schwallie
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In the subject programs, the payroll service providers (American EPay and Hewitt
Associates) have previously procured the specific financial institution where the payroll card
account is to held and the providers administer the payroll card programs. The providers
effectively act as agents of the client employers in discharging the employer’s wage payment
obligations. The control and oversight of the wage distribution by providers who act as agents of
the participating employers thus raise other issues under existing laws. Thus, despite the
voluntariness of an employee’s participation in the pay card program and his or her authorization
for direct deposit of wages, the issue of employee access to the payroll card account, and
specifically any fee imposed for such access, must be further examined due to the relationship of
the deposited funds being held by a bank by arrangement with employer’s agent.

California has a long history of ensuring the protection of wages for California workers.
Specifically, in addition to the conditions for use of wage payments by instruments in Labor Code
§ 212(a), it is unlawful for an employer or their agent to collect or receive from an employee any
part of wages paid (Labor Code §§ 221, 2860), to secretly pay a lower wage while purporting to
pay the wage designated by statute or contract (Labor Code § 223), withholding or diverting
portions of wages (Labor Code § 224), falsely denying the amount of validity of wages with intent
to secure for the employer or any other person any discount of wages (Labor Code § 216(b)). Also,
the California Supreme Court has recognized that “it is manifest that wages due belong to the
employee, and not to the employer...,”; that California courts “have recognized the policy favoring
full and prompt payment of wages (/d.); and that “ wages are not ordinary debts and “because of
the economic position of the average worker and, in particular, his dependence on wages for the
necessities of life for himself and his family, it is essential to the public welfare that he receive his
pay when it is due, (Kerr's Catering Service v. Dept. of Industrial Relations (1962) 57 Cal.2d 319,
326)

Also, although Labor Code § 213 prohibits any of the provisions of Labor Code § 212 from
being read to prohibit wage payment by direct deposit, the conditions in Labor Code § 212(a)
which do not relate the direct deposit (which is the authorized substitute for the use of an
“instrument” for payment) can be appropriately applied to the payroll card aspect of the program
which is the vehicle for receipt of wages. Thus, the requirement that wages be “payable in cash
without discount” would be applicable to the use of the payroll cards.

The above statutory provisions manifest a strong public policy that prohibits an employer
(or its agent) from imposing conditions or obstacles which interfere with or prevent an employee’s
from promptly receiving their due wages in full. The imposition of a fee in order to readily access
one’s earned and paid wages under a payroll card program which is designed to discharge the
employer’s wage payment obligations could impermissibly interfere with an employee’s receipt of
paid wages by creating a financial condition which would have the effect of reducing or
discounting wages because such fee would be charged against the same account in which wages
are deposited.

The payroll card programs reviewed here, however, are described as providing for at least
one transaction per pay period without fee, By providing one free transaction, the payroll card

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Daniel P. Schwallie
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programs effectively provide for immediate and free access to an employee’s wages in full. The
fact that there are other options for employees to choose such as to withdraw a lesser amount does
not render the use of a payroll card violative of the employee’s right to full and prompt payment of
wages, There is a prompt means for an employee to withdraw their full wages as cash on the
established pay day by performing an electronic transaction using the pay card at any VISA
member financial institution (and under American EPay, at any U.S. Post Office). The employee
thus has access to his full wages on the scheduled pay day and thus, the payroll card programs as
described to DLSE do not violate the above stated wage payment provisions.

Additionally, with respect to the use of the payroll card, the other applicable provisions of
Labor Code § 212(a) (not related to the direct deposit provisions in Labor Code § 213(d) or the
requirements for an instrument in § 212(a)) requiring that wages be payable at some established
place of business in the state and there be at least 30 days of sufficient funds for payment (in the
event wages are not immediately accessed by the employee) appear to be satisfied. Employees have
full access to their wages in cash at any VISA-member financial institution in California (and
nationwide) as well as at any program merchants and designated surcharge free ATMs. The funds
deposited into the employee accounts are held for at least 30 days.

Labor Code § 212(a)(2) further prohibits the use of any “scrip, coupon, card, or other thing
redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money.”
Under the described program, the deposit by the employer into the employee’s account is payable
in cash up to the full amount of his or her wages. The fact that there are other options for
employees to choose such as to withdraw a lesser amount or ha