Chipotle is the latest retailer to learn that circumventing California’s gift card cash-out laws can cost far more than the value of the cards. The fast-casual restaurant giant was hit with a $246,000 fine over allegations that it failed to allow customers to redeem the unused portion of their gift cards in cash, as required by California law. More significantly, the chain was ordered to set up a website where customers could cash out their gift cards.
A class-action lawsuit filed last year accused Chipotle of offering meal vouchers to customers seeking refunds for the unused portion of their prepaid cards. In addition to not providing cash, as the law requires, the vouchers also expired after 30 days—whereas California law mandates that gift cards have no expiration date. In settling the suit, Chipotle denied any wrongdoing.
California is one of many states that require gift card issuers to redeem low-balance gift cards for cash upon request. The currently threshold of $10 is set to rise to $15 next year.
Following Home Depot and Taco Bell
In a similar case, Home Depot was charged with violating the law last year. In addition to a $750,000 fine, it was ordered to reprogram all its registers to automatically cash out gift card balances under $10. Taco Bell faced a similar fine and was required to implement cash-back training for all its store managers. Like Chipotle, these companies appear to have relied on individual stores to handle these redemptions on their own.
“In general, brands do a good job of complying, so these instances are rare,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. “There are also some questions about how cash back must be supported—some merchants believe that you can centralize this so the stores aren’t responsible on an individual level. The reality is that the cash back laws are a little vague in terms of process, creating those questions for retailers.”
Tough Decisions
As the state with the largest economy, California will continue to serve as a bellwether for retailers. Franchises that train employees on handling gift cards will need to consider California’s restrictive laws. However, for large, nationwide brands, the costs of supporting cash back policies may outweigh the potential penalties.
“The amount of training to staff—especially in industries with high turnover—for a relatively small occurrence is likely more costly and burdensome than the penalty,” Hirschfield said. “That’s true even in a state as large as California, which produces high amounts of total revenue.”
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