CPA Practice Advisor - 18

A YEAR IN THE LIFE: PAYROLL

ACCOUNTANT

Can Employers Make Direct
Deposit Mandatory?

By Rachel Blakely-Gray

MANY EMPLOYEES-82% according to a NACHA survey (www.
bit.ly/23LNLui) - receive their wages via direct deposit. When
you are deciding how to pay your employees, direct deposit likely
comes to mind. However, not all employees want to receive their
wages through direct deposit. Can you require mandatory direct
deposit? Brush up on federal and mandatory direct deposit by
state laws before requiring direct deposit for your workforce.
WHAT IS DIRECT DEPOSIT?
Direct deposit is an electronic funds
transfer (EFT) that lets you put your
employees' paychecks directly into their
checking or savings accounts. Sure, you
can pay employees with paper checks,
cash, or even pay cards. But, using direct
deposit to pay your workforce can save
you time and keep your payroll secure
and organized. As with anything, there
are pros and cons of direct deposit.
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 handling paper checks.
For employers, direct deposit is a convenient approach to paying employees.
Some payroll software providers even
offer free direct deposit.
Because of the benefits of direct
deposit, you may wonder: Can employers
require direct deposit? To answer this
question, you need to look at federal and
state direct deposit laws.

FEDERAL MANDATORY
DIRECT DEPOSIT LAWS

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PAYROLL Accountant
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18

JUNE 2019 ■

The Electronic Fund Transfer Act (EFTA)
protects employers and employees who
use features like direct deposit. Under
federal law, employers can require
employees to receive their wages via
direct deposit. However, employers
must meet the federal requirements
for direct deposit. You can make direct
deposit mandatory if you do ONE of the

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following:
■ Let the employee choose the bank to
access their direct deposit
■ Choose the bank the employee must
access their direct deposit from, but you
also offer another payment option (e.g.,
paper check or cash)
For more information on federal
mandatory direct deposit laws, check
out the Federal Reserve System's website (https://bit.ly/2QsDZfm). Although
federal law might allow you to create a
mandatory direct deposit policy, your
state might not.

MANDATORY DIRECT
DEPOSIT BY STATE
Can an employer require direct deposit
under state law? It depends on the state.
If your state has a law either for or
against required direct deposit, you must
follow it. States without mandatory direct
deposit laws follow federal laws. Because
federal law allows mandatory direct
deposit, employers in states without laws
can require this payment method.
State laws aren't as straightforward
as federal law. Each state can set its own
direct deposit laws. And, they can set
further regulations. For example, your
state might have specific direct deposit
laws that:
■ Prohibit employees from incurring direct
deposit fees
■ Let employers choose the financial
institution

■ Refer to certain sectors, such as private
employers
■ Pertain to specific industries, like
agricultural employers
■ Allow employees to opt out of direct
deposit with a written statement
Check with your state's department
of labor (https://bit.ly/2hgRwat) for more
state-specific regulations. If your state
does not give you the ability to make
direct deposit mandatory, don't worry.
You can still offer it as a payroll option.

YOU WANT TO OFFER
DIRECT DEPOSIT TO
EMPLOYEES. NOW WHAT?
Whether you require mandatory direct
deposit or want to offer it as a payment
option, you must gather employee information. According to both federal and
state law, your employee must authorize
direct deposit by providing the following:
■ Bank name
■ Type of account (checking or savings)
■ Routing number
■ Account number
You may also want to ask your
employees for a voided check with their
direct deposit information to verify the
account and routing numbers are correct.
Make sure you keep your employees'
direct deposit information on record.
And, place the information in a secure
location. If you choose to use direct
deposit, you may need to give your
employees a statement showing how
much you deduct from their paychecks.
This statement is known as a pay stub.
You can provide pay stubs either online
or give employees paper pay stubs. ■
Rachel Blakely-Gray is a writer for Patriot
Software, a provider of payroll and human
resource management solutions.
http://www.bit.ly/23LNLui http://www.bit.ly/23LNLui https://www.bit.ly/2hgRwat https://www.bit.ly/2QsDZfm http://www.CPAPracticeAdvisor.com
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