Direct deposit allows employers to electronically transfer employees' net pay into their bank accounts. This eliminates the need for employees to receive a paper check and can help employers save money. If you haven’t already implemented direct deposit, you may have asked whether you can require employees to enroll in direct deposit? This week’s Tip answers this, and other common questions about direct deposit.

Q: What are the advantages of direct deposit for employers?

A: There are a number of potential advantages for employers, such as:

• More time. The time and money spent on printing, mailing, reconciling, and reissuing paper paychecks can add up. Going paperless eliminates the need to hand out paper checks or wait for payroll delivery.
• Easier payment of final wages. When employees leave the company, providing their final wages via direct deposit can be easier than providing a paper paycheck. This is especially true for employees who quit without notice, or who work in states that require final pay immediately upon separation. Setting up direct deposit for an employee's final wages tends to be easier than arranging for the employee to pick up his/her final paycheck or mailing it.
• Improved productivity. If employees are using their lunch or rest breaks to cash their paycheck, they may be late returning to work and/or may not be getting the full benefit of their meal or rest period.

Q: What are the advantages of direct deposit for employees?

A: Consider explaining the benefits of direct deposit to your employees, including how it:

• Eliminates the need to go to the bank to deposit their paycheck.
• Typically provides access to deposited funds faster and on a more predictable schedule.
• Allows employees to conveniently distribute their paycheck into multiple accounts, such as checking, savings, and retirement accounts.
• Eliminates the need for employees to pick up their paycheck when they are on vacation or otherwise away from the office.

Q: Can I require employees to use direct deposit?

A: In a majority of states, direct deposit is generally permitted only if the employee voluntarily authorizes it. Typically, the employee's consent must be in writing. While a few states permit mandatory direct deposit, states generally also list exceptions to the requirement. Employers should check their state law for compliance. Employers should also evaluate whether a mandatory direct deposit policy would disproportionately exclude members of a protected class, and if so, offer other options for the receipt of wages. Note: For state specific requirements around direct deposit, Comprehensive HR Clients can access a 50-State Survey covering direct deposits in their HR Encyclopedia.

Q: When should I get employees' authorization for direct deposit?

A: Most employers seek authorization of direct deposit at the time of hire, when employees are filling out other new hire paperwork. Even if employees initially decline direct deposit, let them know that they can join at any time. You may want to remind employees of the direct deposit option at least annually in case their circumstances or needs have changed.

Q: Even though my state prohibits me from requiring employees to use direct deposit, can I encourage them to use direct deposit?

A: Yes, employers may encourage employees to use direct deposit. To promote greater use, consider mentioning the benefits of direct deposit for employees, including the ones listed above.

 

Q: If I use direct deposit, do I still need to provide a wage statement to employees?

A: Most states require employers to provide a wage statement to employees each pay period, regardless of whether wages are paid by paper check or electronically. In the absence of a specific requirement, it is a best practice to provide a wage statement each pay period. Note: For state specific requirements around what information must be on a wage statement, Comprehensive HR Clients can access a 50-State Survey covering wage statement requirements in their HR Encyclopedia.

Direct deposit can benefit both employers and employees. When implementing direct deposit, make sure your policies and practices regarding wage payments and direct deposit comply with federal, state, and local laws.