Direct deposit seems like a simple topic hardly worthy of a blog post. However, it’s not so simple. Employers pay employees by transferring money directly to the employees’ bank accounts. It’s convenient for small business owners, who save check printing costs and bank check processing fees, and employees have access to the funds on payday instead of waiting until their paychecks clear.
So why is this such a big deal?
Not only are there federal laws businesses need to follow; there are also state laws to consider. The possibility of unintentional discrimination exists (more on that later). That’s where it gets sticky.
Some states allow employers to require employees to accept direct deposit of wages and bonuses. Others allow employees to choose between direct deposit and traditional paychecks. In addition, federal regulations govern direct deposit of salaries and other employee payments.
So let’s get into it.
Federal Payroll Direct Deposit Laws
Some small businesses may want to try to save money on direct deposit fees by having employees open direct deposit account at the bank where the business holds its own accounts. But this is illegal, according to the Federal Deposit Insurance Corporation (FDIC). Employers cannot require their employees to use any particular financial institution for receiving direct deposit of wages or bonuses.
However, the FDIC does not prevent an employer from requiring direct deposit as long as the employee chooses the receiving bank. An employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer) or receiving their salary by another means, such as by check or cash. Now that we have the federal law down, let’s look at the direct deposit laws by state.
States Without Laws Regarding Direct Deposit
States Allowing Required Direct Deposit
- South Carolina
- West Virginia
These states allow employers to require all employees to accept direct deposit of wages. But even these states make exceptions for employees who do not have bank accounts, who may receive wages in cash, check or payroll card form.
States Requiring Employee Agreement for Direct Deposit
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
These states require employees to consent to receiving wages in direct deposit form. Some of these states require specific written permission, which must be retained by the employer.
States with Specific Direct Deposit Regulations
In Arizona, an employee must either specify a bank at which he or she wishes to receive direct deposit payments or agree to receive salary payments via electronic pay card.
Arkansas requires employees to specify in writing that they wish to receive checks if their employer has instituted direct deposit. Utah allows employers to require direct deposit only if they are required to pay a minimum of $250,000 in state payroll tax or if two-thirds of the workforce of a firm agree to direct deposit.
Take This Final Tip To The Bank
There is one more issue to consider: the potential for disparate impact or unintentional discrimination. Even if you can legally require direct deposits, you might want to think twice about that.
Because those employees without bank accounts are often part of the protected classes, employers might want to consider policies that strongly encourage direct deposits but offer other options to avoid potential claims of discrimination.
Make sure to keep that in mind when developing your policy. We are here to answer questions that relate to your specific situation. Reach out to us here.