Innovative Payroll Practices May Not Be Legal

Case of MoneyConnecticut law still allows employees to be paid their weekly pay in cash in pay envelopes, although this cumbersome practice has largely if not entirely given way to more modern forms of disbursement. In particular, electronic transfers of funds, such as direct deposit, are an inexpensive and easy way to meet payroll.  But methods of wage payment are controlled by statutes – in Connecticut and elsewhere – which do not necessarily suit the convenience of employers.

This lesson was learned by the payroll department of Petsmart, Inc. in a class action wage-hour lawsuit recently settled in California.  Petsmart disbursed final pay to departing employees in the form of a “paycard,” an ATM-like card which caused the employees to incur fees for its use.  This violated a California statute requiring final pay to be paid “without discount,” and another statute which allowed employees to choose direct deposit or paper checks as their method of receiving their pay.  The paycard method would not likely fare any better in Connecticut.

Section 31-71c of the Connecticut General Statutes requires final wages for a terminating employee to be paid “in full” (on the next regular payday for an employee who voluntarily quits, and on the next business day for an employee who is discharged).  A pay device which causes a fee to be deducted in order to obtain the funds would not be full payment of wages due.  Assuming paycards allow a significant savings in payroll processing, one wonders whether Petsmart could have avoided litigation by grossing up the final pay by a few dollars to cover the paycard fee.

Connecticut, like California, also has a second limitation on pay methods, namely the requirement in Section 31-71b(a)(1) that employees be paid “in cash” or “by negotiable checks,” or by direct deposit “upon the employee’s written request.”  Employers cannot impose direct deposit; if any employee does not authorize direct deposit, wages must be paid in cash or by paycheck. It seems that where innovation in payroll practices is allowed, it will be for the benefit of employees rather than payroll departments, and only with employees’ consent.