Yes, this is a son of the old "company store" scam. I just looked at the California Labor Code section on this:
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
(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
(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
So California law prohibits the "company store" scam - employers can't pay with a "gift card" that doesn't convert to cash. And if they pay using a bank, the check or card must be cashable, without fees, at any branch of that bank. The problem is ATM fees for off-network ATMs, which have become a huge profit center for banks.
If the card is from a bank with a huge number of branches and lots of ATMs, it may not be too bad. If it's from some second-tier bank, it's a rip-off.