Can You Require a Switch to Direct Deposit?

It may not be long before paper paychecks go the way of the five-and-dime store and the VCR. They may soon become obsolete as “direct deposit” into bank accounts is the predominant method of paying employees. And why not? All of the banking — including depositing the amounts into the employee’s account and acceptance of the funds — can be completed with just a few clicks of a mouse. Employees don’t have to worry about losing their checks and it reduces payroll hassles for employers.

The move to the direct deposit method won’t be a change for the vast majority of U.S. employees. According to one survey by the American Payroll Association, 96% of employees are already using direct deposit. Chances are it’s even more common for workers located in remote sites. No more waiting for checks to arrive by snail mail and no trips to the bank to deposit the checks.

While we remain in the final transition period from paper to electronic payment, several questions may be raised about this technology.

Federal Parameters

One key question is: Can an employer require its employees to use the direct deposit method? And, if it does, are there any restrictions on the practice? Generally, state law applies in this area, but let’s take a closer look.

On the federal level, the Fair Labor Standards Act (FLSA) — which is the governing law for many payroll matters — doesn’t expressly address the issue. However, under interpretative regulations issued by the Department of Labor, it’s clear that employers can use direct deposit as long as they also give employees the option for receiving wage payments by check or cash. In addition, employees must be permitted to select the financial institutions that will receive direct deposits. Employers can’t dictate which bank to use.

Alternatively, an employer may arrange for employees to cash a check drawn against its payroll account at a convenient location (for example, within walking distance of the workplace). This service must be available without any charge.

State Parameters

Now let’s turn our attention to the individual states. Most states have enacted legislation governing how employees must be paid and when.

Although practically all authorize the use of direct deposit, most states impose certain restrictions. One such restriction is that employers cannot require employees to accept the direct deposit method. For example, in California, the employee’s express authorization must be given and employees have the right to choose any California bank, credit union, or savings and loan association in which to receive deposits.

In some states, receipt of pay via direct deposit may be imposed as a condition of employment, albeit under the following conditions:

• Employers can’t charge a fee for this service.
• The employer can’t require employees to use a specific financial institution.
• Employees must be able to access their pay stubs.

Note: If an employee doesn’t have a bank account, payments may still be made via a paycard.

Pay Statements

The FLSA doesn’t require employers to provide pay stubs to employees, but it does impose recordkeeping rules for wages and the time worked. In several states — including Arizona, Colorado, Connecticut, Hawaii, Iowa, Maine, Minnesota, New Mexico, North Carolina, Texas and Vermont — employees have the right to receive printed pay stubs. However, most states currently permit employers to use electronic pay stubs if:

1. Employees can access the pay stub electronically.
2. Employees have a unique, secure login.
3. The pay stubs can be printed out.

Finally, some states don’t require employers to provide any pay stubs at all — including Arkansas, Florida, Louisiana, Mississippi, Nebraska, South Dakota, Tennessee and Virginia.

Other special rules or restrictions may apply if employees are paid by direct deposit. For instance, in New York, an employee’s written consent must be obtained before implementing direct deposit. But this requirement doesn’t apply to executives, administrators or professionals who earn more than $900 per week. In Florida, the law states that an employee can’t be terminated solely for the reason of refusing direct deposit.

It’s imperative for employers to be in full compliance with state laws and to maintain these standards once direct deposit is in place. Consult with your payroll advisers concerning the applicable rules in your state.