§ 212-enacted in 1910 to curb the abuses of the 'company town'-forbids California employers from paying wages by "check . . . 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 . . ." Labor Code § 212(a)(1). Although § 212 served its purposes well for many decades, the requirement that payroll checks be drawn on an institution located within the state is not a good fit with the modern national banking system, where checks are freely negotiable but sometimes subject to holds (if the employee deposits it into a bank account) or service fees (if cashed). Although California's Legislature has tried to update § 212 to make it work fairly with today's banking laws, a series of federal district court decisions has adopted a facially erroneous interpretation of § 212 which frustrates the will of the Legislature and makes employers vulnerable to another form of class action suit. The most recent of these decisions came on December 10, 2007, in Regis v. Solis Corp., 2007 WL 4328806 (N.D. Cal. Dec. 10, 2007).

In Regis, the plaintiff alleged a variety of class wage hour claims, including one for penalties for violating § 212. Because it was undisputed that the employer paid its California employees with payroll checks drawn on LaSalle Bank, a Chicago-based national bank that did not have any offices in California, the district granted a summary judgment that the employer violated § 212 "based solely on the out-of-state checks." Id. at *1-2. It also held that a violation of § 212 subjected the employer to two possible penalties: If the employee had to pay a fee to cash his or her check, or if the funds were subject to a hold after they were deposited in the bank, then the employer was responsible for "unlawfully withholding wages due" and is subject to the penalty established in Labor Code § 225.5. Id. at *2-3. If, however, the employee was able to cash the out-of-state check without any fees or hold, the employer was still liable under Labor Code Private Attorney General Act's ("PAGA's") 'catch-all' penalty provision, Labor Code § 2699(f). Id. at *3. Both penalties are the same: $100 for the first violation, and $200 for each subsequent violation. Labor Code §§ 225.5, 2669(f). However, under PAGA (but not § 225.5), the trial court has broad discretion to impose a lesser penalty. Labor Code § 2699(e).

The Regis decision gives only cursory consideration to the question of liability, assuming that if payroll checks are drawn on out-of-state banks, they violate § 212. This is not the case, however. In 1997, in an effort to update § 212 in light of the rise of the modern banking system,1the Legislature added subdivision (c), which provides: "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." Under subdivision (c), which is never cited in the Regis decision, the employer has complied with § 212.

Without a doubt, the court in Regis assumed the validity of the interpretation given to subdivision (c) by a fellow judge in the Northern District who ruled in 2006 that subdivision (c) "applies to bank employers and only exempts them from the requirement of printing the name and address on the paycheck." Fleming v. Dollar Tree Stores, Inc., 2006 WL 2975581, *3 (N.D. Cal. Sept. 15, 2006). Fleming appeals to "[b]oth the plain meaning and the legislative history" of subdivision (c) to justify its interpretation. Id. Unfortunately, neither provides any support for Fleming's holding.

Fleming evidently reasoned that the phrase "drawee is a bank" in subdivision (c) means that a bank employer issues the payroll check to its employees. But that is simply not the plain meaning of "drawee." The plain meaning is that the "drawee" is the employer's bank. The employer is the "drafter" or "drawer" of the check, and the employee is the "beneficiary" of the check. See, e.g., Random House Webster's College Dictionary, p. 400 (2nd Ed. 2000) ("drawee" means "a person on whom a bill of exchange is drawn"). The legal or financial meaning of "drawee" is the same. California law defines a "check" as "a draft, other than a documentary draft, payable on demand and drawn on a bank." Commercial Code § 3104(f)(1). A "drawee" is "a person ordered in a draft to make payment." Commercial Code § 3103(2). A "drawer" is "a person who signs or is identified in a draft as a person ordering payment." Commercial Code § 3103(3). The Legislature was well aware of this meaning when it enacted subdivision (c), and used the term "drawee" and "bank" interchangeably throughout the Commercial Code.2

The "legislative history" on which Fleming relied was a single post-enactment document, and "Enrolled Bill Report" prepared by the Governor's staff. Fleming, 2006 WL 2975581, at *3. This report suffers the same flaw as Fleming's analysis of the plain meaning of subdivision (c)-it shows no awareness of how the term "drawee" is used in California commercial law. Moreover, reliance on Enrolled Bill Reports for legislative intent is, at best, questionable. In Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc., 133 Cal. App. 4th 26 (2005), the Third District held that "in order to be cognizable, legislative history must shed light on the collegial view of the Legislature as a whole." Id. at 30 (emphasis in original). Although Enrolled Bill Reports fail this test, the courts have sometimes found them "instructive," although "without great weight." Elsner v. Uveges, 34 Cal.4th 915, 934 n.19 (2004).

In addition, it is worth noting that in Wells Fargo Bank of Texas NA v. James, 321 F.3d 488, 489 (5th Cir. 2003), the Fifth Circuit held that the National Bank Act, 12 U.S.C. § 21 et seq., preempted a Texas statute whose provisions were essentially identical to the interpretation of § 212 adopted in Regis and Fleming. Curiously, Fleming held that the National Bank Act did not preempt § 212, but did not discuss (or even cite) the Fifth Circuit's opinion. See Fleming, 2006 WL 2975581, at *3-4.

Although Solis and Fleming are not published decisions, both are freely available online. Given California 's class-action-friendly litigation climate, and the availability of multiple penalty provisions that might apply to violations of § 212, California employers would be well-served to review their payroll practices and take a second look at their reliance on subdivision (c)'s safe harbor, which may come with a high litigation price.

Footnotes

1. According to the bill's sponsor, "The primary rationale for SB 496 is the evolving nature of the banking industry in California and the nation. When Section 212 was originally enacted few employees used banking services and those few that did used a specific branch. At that time, the economy was still largely a cash economy. Today, banks engage in interstate banking and statewide banking . . . Most simply, the requirement that a bank's address appear on a check does not reflect the modern 'system-wide' approach to 21st century banking." Assembly Committee on Labor and Employment, S.B. 496 Background Information Request 1997 Session, at 2.

2. See, e.g., Commercial Code §§ 3407(c) ("A payor bank or drawee paying a fraudulently altered instrument . . . in good faith and without notice of the alteration, may enforce rights with respect to the instrument . . . ."), 3408 ("A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it."), 3409(a) ("Acceptance" means the drawee's signed agreement to pay a draft as presented."), 3414 ("If (1) a check is not presented for payment or given to a depositary bank for collection within 30 days after its date, (2) the drawee suspends payments after expiration of the 30-day period without paying the check, and (3) because of the suspension of payments, the drawer is deprived of funds maintained with the drawee to cover payment of the check, the drawer to the extent deprived of funds may discharge its obligation to pay the check by assigning to the person entitled to enforce the check the rights of the drawer against the drawee with respect to the funds."), 3418(a) ("if the drawee of a draft pays or accepts the draft and the drawee acted on the mistaken belief that (1) payment of the draft had not been stopped pursuant to Section 4403 or (2) the signature of the drawer of the draft was authorized, the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made or, in the case of acceptance, may revoke the acceptance. Rights of the drawee under this subdivision are not affected by failure of the drawee to exercise ordinary care in paying or accepting the draft.").

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