Direct Deposit Of Employee Wages – August 11, 2006

Employers are continually searching for methods to reduce costs and streamline administrative operations, and the scrutiny of the expensive and time-consuming payroll process has been one of the primary targets. More and more employers are looking at direct deposit of payroll as the preferred method of paying employees. This article examines the concept of direct deposit, including the benefits, concerns and legal considerations.

Direct Deposit is the electronic transfer of a payment from a company or organization into an individual’s checking or savings account. In banking terms, direct deposit is an Automated Clearing House (ACH) application that allows consumers to have their paycheck or other deposits electronically deposited or credited to a savings, checking or other type of account at any financial institution. The employer supplies its financial institution with payment information and that financial institution then electronically sends transactions to the ACH operator for distribution to the employee’s financial institution. The financial institution requires written authorization from the employee.

Studies indicate that more than 70 percent of all workers in this country receive their pay through direct deposit. Eighty percent of large companies (companies that employ more than 500 employees) offer direct deposit of employee wages. Many employers and employees consider direct deposit an important employee benefit. Educational institutions, state and federal governmental agencies and retirement administrators often require direct deposit. Over 85% of people receiving social security benefits use direct deposit and over 500,000 companies in this country offer direct deposit to their employees. Direct deposit is even more common outside of the United States. Almost all European and Japanese workers receive their pay by direct deposit.

Payroll deposit is one of the most common uses of direct deposit. However it may be used for many other deposit applications including bonus payments, commissions, expenses reimbursements, benefits, dividends, child support, social security, retirement and pension payments, tax refunds and many others.

Payroll direct deposit can significantly reduce production, administration and distribution costs of paying an employee. The average cost to issue a paper paycheck is approximately $1.20 per employee, not including distribution or postage expenses. The Financial Management Service has estimated that the federal government saves more than $100 million each year by using direct deposit. Direct deposit eliminates concerns about lost or stolen paychecks and the expense of stop payment charges. Employers often experience an increase in employee productivity on paydays since employees no longer leave work to deposit a paycheck. A number of internal operating efficiencies are generally reported by employers who implement direct deposit programs. The potential for fraud is reduced because there are fewer opportunities for counterfeit checks, stolen checks, signature plates, altered amounts and forged signatures and there is no need for facsimile signature security. Companies of any size can offer direct deposit. A payroll card program can be set up for employees who do not have bank accounts.

Employees who receive their pay through direct deposit have immediate access to funds on payday. There is no waiting period for checks to clear and no hold placed on an out of state check. Deposits are made automatically and timely. The employee is provided with an earnings statement or paper record of the deposit, including all of the information historically found on a paycheck stub such as sick pay and vacation accruals. Employees do not need to leave the office on payday to stand in line at the bank, and they have the security of knowing that their pay has been deposited when they are out of the office or on vacation. Employees also benefit by the safety and security of the transaction, and the potential for increased interest accrual. In addition, many employers offer split deposits which employees can use to automatically increase savings by directing a portion of their pay directly into a savings account. Many financial institutions offer free checking and other account benefits to customers who use direct deposit.

Problems with direct deposit are rare because the transaction is electronic. Some statistics indicate that paper checks are 20 times more likely to cause problems than direct deposit. Generally problems with direct deposit are more easily corrected than problems with paychecks. The same procedures used to correct a problem with a paycheck can be used to correct to correct an error by direct deposit. Communicating any account changes or closures to the employer ahead of time will reduce the possibility of a problem with direct deposit.

The Federal law prohibits an employer from mandating direct deposit to a “particular financial institution”. As long as the employee may choose his or her own bank, federal law is satisfied. However, state laws on the subject of direct deposit vary widely. Some states allow mandatory direct deposit and others require an employee’s voluntary consent. Individual state laws and/or the state department of labor should be consulted before implementing a mandatory direct deposit program.

Since mandatory direct deposit is not always an option, many employers have utilized different methods to promote direct deposit to employees. Educating employees about the benefits of direct deposit and addressing their concerns and misconceptions, often increases employee participation significantly. First, encouraging all new employees to sign up for direct deposit at the time of hire is helpful. In some states employers may even make direct deposit a condition of employment for all new employees. Periodic paycheck inserts are an effective method of reminding employees about direct deposit. Reminders about direct deposit can be printed on paychecks as well. Employers may offer incentives to employees who sign up for direct deposit or to human resource staff who assist in the process. Also, financial institutions may offer employee seminars about the security and benefits of direct deposit or supply promotional videos.

Direct deposit is a secure and efficient method of managing employee payroll and is expected to continue to increase in popularity for employers and employees. The benefits to all parties have far outweighed the concerns initially raised about the process.

The author, Ann B. Plunkett, is an employment attorney and president and founder of WorkPlace Partners, Inc., a full-service human resource consulting firm. Ann is a frequent guest speaker on a variety of employment law and human resource topics.