3 Things You Should Know about Direct Deposit

Direct deposit is clearly the dominant method for paying employees. We've seen estimates that suggests more than 85% of America's employers either require direct deposit or offer it as an option. We see no reason to question those estimates given the number of our clients who utilize direct deposit.

With all that said, you know that there are other options. You can pay your employees in cash or with paper checks. There is also the payroll card, a card that works a lot like a prepaid debit card. There are even isolated instances of payroll providers paying their employees in cryptocurrency.

For the purposes of this post, we will stick with direct deposit. As the most common form of employee payment, it is quite likely your company either requires or offers it. Assuming that is the case, here are three things you should know:


1. Employers Can Require It

According to the Electronic Fund Transfer Act (EFTA) of 1978 – a.k.a. Regulation E – employers are permitted to require workers to accept pay via direct deposit under one condition: they must also allow their workers to choose their own banks.

In other words, you can tell your employees that they must accept direct deposit payment. However, you must deposit their pay into whatever banks they choose. You cannot mandate both direct deposit and the depositing bank.

Should you decide, for whatever reason, you only want to make deposits into a single bank, you can affect that policy. But you must also give employees the option to receive their pay by either paper check or cash. They cannot be forced to use the bank of your choosing for direct deposit.


2. State Laws Differ

As with most things relating to payroll, federal law allows state laws to supersede certain portions of Regulation E. Many states do. Unfortunately, state laws differ. There is no way to make a blanket statement saying that all states do X, Y, or Z.

Take New York and Florida. While both states do allow employers to mandate direct deposit, they must obtain written permission from each employee. Typically, this means furnishing a form the employee complete and sign. Workers enter bank information on the form for routing purposes.

Texas and South Carolina also allow employers to mandate direct deposit. However, employees who do not have a bank account must be allowed to choose another option.

The point here is that some state laws enhance Regulation E while others completely supersede it. Employers have to check with their own states to find out where they stand. If your company uses a payroll provider like BenefitMall, that provider should already know what applies in your state.


3. Employees Must Get Their Full Pay

Finally, the freedom to require direct deposit does not allow employers to force workers to accept less than every penny they are legally due. This issue has come to the forefront with the emergence of payroll cards. A number of court cases arose in 2017 as employees sued over the fees and charges attached to their payroll cards.

The long and short of it is that federal and state laws don't allow employers to force payment methods on workers if said payment methods include fees and charges that result in employees not receiving their full pay. If a bank assesses a charge for direct deposit, the employer has to absorb it. The fee cannot be passed on to employees.

If you are a BenefitMall client and you have questions about direct deposit, feel free to contact us. If you're not a client, let's change that.



Fed – https://www.federalreserve.gov/boarddocs/caletters/2008/0807/08-07_attac...