10 Apr Can You Make Direct Deposit Mandatory?
In 2016, the National Automated Clearing House Association (NACHA) reported that 82% of U.S. employees are paid by direct deposit, jumping from 74% in 2011. Clearly, direct deposit is on the rise.
But you may be surprised to learn that, according to the NACHA survey, 64% of direct deposit users “utilize the service because their employer encourages or requires it.” Further, 37% of those who don’t use the service say it’s because their employers do not offer it. The first statistic tells us that some employers actually require direct deposit. But can you? Read on to find out.
Federal Law on Direct Deposit
The Electronic Fund Transfer Act (EFTA), also known as federal Regulation E, permits employers to make direct deposit mandatory, as long as the employee is able to choose the bank that his or her wages will be deposited into.
Alternatively, employers can choose the bank that employees must use for direct deposit. But in that case, the employer must also provide employees another means of payment, such as cash or paper check. The employee can then decide whether to go with direct deposit at the bank of the employer’s choosing or with the other means of payment.
State Law on Direct Deposit
In some states, an employer can make direct deposit mandatory, provided certain stipulations are met. For instance, employers in Kansas, Indiana, Texas, Missouri and South Carolina can require employees to accept direct deposit, but the employer must provide another payment method — such as payroll card, cash or check — to employees who do not have a bank account.
In many states — including California, New York, New Jersey, Florida, Vermont and Illinois — employers must obtain written permission from employees in order to pay them by direct deposit. A good rule of thumb is to require written authorization from the employee, even if state law doesn’t say to.
In some states that allow employers to require direct deposit, the rules are very specific. For example, in Utah, an employee cannot refuse payment of wages via direct deposit if:
- In the prior year, the employer’s annual federal payroll tax deposits amounted to at least $250,000, and;
- At least two-thirds of the employer’s workers are being paid by direct deposit.
At the very least, the state may adopt the provisions of Regulation E. If the state extends additional protections to employees, the employer must use the law offering the employee the most benefits. And if the state does not have laws on direct deposit, federal law applies.
You can determine your state’s stance on direct deposit by examining its wage payment statutes, which may also require that you give employees a pay stub each time they are paid — whether by direct deposit, check, cash or payroll card. Of course, this is just a summary of complex state rules, which may contain additional provisions and exceptions, and also which can change frequently. Be sure to get professional advice on the current rules in your jurisdiction before implementing a policy at your business.
Payroll Partners is committed to helping clients stay informed about payroll and human resource news. This article is intended to provide readers with general information on human resources matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular practice. All efforts have been made to assure the accuracy of the information. Payroll Partners does not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular practice. If you are seeking human resources advice, you are encouraged to consult a human resources professional.