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Can You Make Direct Deposit Mandatory?

 

In 2016, the National Automated Clearing House Association (NACHA) reported that 82 percent of U.S. employees are paid by direct deposit, jumping from 74 percent in 2011. Clearly, direct deposit is on the rise.

But you may be surprised to learn that, according to the NACHA survey, 64 percent of direct deposit users “utilize the service because their employer encourages or requires it.” Further, 37 percent 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.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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