We live in the age of technology. For the most part, many aspects of business are done online without a physical paper trail. So when you are planning how to pay your employees, you may consider direct deposit.
Direct deposit is an electronic funds transfer (EFT) that lets you put your employees’ paychecks directly into their checking or savings account. Can employers make direct deposit mandatory?
Why use direct deposit?
Direct deposit can save you time as well as make sure your payroll is secure and organized. Employees can increase their personal savings and eliminate the hassle of running to the bank to deposit a paycheck every payday. However, some employees prefer to receive paper checks on payday to handle themselves. As with anything, there are pros and cons of direct deposit.
Because of the benefits of direct deposit, one gleaming question may come to mind: can employers make direct deposit mandatory? The answer depends on the location of your business.
Federal direct deposit laws
There are federal laws on direct deposit, but states can also make regulations. The Electronic Fund Transfer Act (EFTA) protects employers and employees who use features like direct deposit. Federal law says that employers can make direct deposit mandatory. However, one of the following conditions must be met:
- The employee must be able to choose the bank for direct deposit
- If the employer chooses the bank, they must offer another form of payment for the employee, such as a paper check
Keep in mind that state regulation may prevent employers from choosing the bank for direct deposit. Check with your state’s department of labor for more information.
According to both federal and state law, the employee must authorize direct deposit by providing the following:
- Name and routing number of the bank
- Type of account (checking or savings)
- Account number
You may also want to ask your employees for a voided check with their direct deposit information to verify the numbers are correct. Make sure you keep your employee’s direct deposit information on record.
If you choose to use direct deposit, you will need to give your employee a statement showing how much is deducted from their paycheck. The statement can be online or on paper.
Direct deposit laws by state
State laws aren’t as straightforward as federal law. As a small business owner, you will need to follow your state’s laws. Check with your state’s department of labor for specific regulations. The chart below shows mandatory direct deposit laws by state for small businesses.
Can Employers Make Direct Deposit Mandatory?
States that Allow Mandatory Direct Deposit
*Arkansas, Oregon: Employee can request another form of payment
*Kansas: Employer must give other payment option if employee does not have an account
*Maine: Employees must be able to withdraw full amount of first paycheck without service fees
*Iowa, New Mexico: Authorization not required for new hires
*Michigan, Virginia: Employer can pay by pay card if employee does not authorizeEmployees cannot incur direct deposit fees in italicized states (both voluntary and required direct deposit)
States that Require Employee Authorization
If your state does not give you the ability to make direct deposit mandatory, don’t worry. You can still offer it as an option for payroll.
Patriot’s online payroll software lets you use direct deposit or print checks to accommodate all employees. Keep track of your employees’ work hours in three easy steps. Try it for free today!
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This is not intended as legal advice; for more information, please click here.