Direct deposit: it seems simple enough. 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 what’s the big deal?
Well, there are not only federal laws businesses need to follow; there are also state laws and the potential for unintentional discrimination (more on that later). And that’s where it gets tricky.
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 break it down.
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. Also, 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 with No Laws Regarding Direct Deposit
All of these states have no clear laws restricting direct deposit in any way.
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 in electronic paycard form.
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
Now that we’ve discussed the all the legal aspects of direct deposits, 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.
Would you like an easy way to remember the direct deposit and pay stub laws for your state? We’ve created a chart that you can use to help you keep it all straight!
Download our Direct Deposit & Pay Stub Laws By State Chart Below