Direct deposit allows employers to electronically transfer employees' net pay into their bank accounts, eliminating the need for employees to receive a paper check. There are many advantages to direct deposit. But, we often get questions regarding its use. Below, we answer some of the top questions we receive about direct deposit.
Q: What are the advantages of direct deposit for employers?
A: There are a number of potential advantages for employers, such as:
- Save time and money. The time and money spent on printing, mailing, reconciling and reissuing paper paychecks can add up. Going paperless eliminates the need to hand out paper checks or wait for payroll delivery.
- Improve productivity. If employees are using their lunch or rest breaks to cash or physically deposit their paycheck, they may be late returning to work and/or may not be getting the full benefit of their meal or rest period.
- Get more predictability. With direct deposit, employers know exactly when the funds will be withdrawn from their account, which offers more predictability for ensuring that enough funds are available for payroll, and to pay other expenses, such as rent or utilities.
Q: What are the advantages of direct deposit for employees?
A: There are several benefits of direct deposit that you can explain to your employees, including that it:
- Eliminates the need to go to the bank to deposit their paycheck, which can cut into a meal or rest period.
- Typically provides access to deposited funds faster and on a more predictable schedule.
- Allows employees to conveniently distribute their paycheck into multiple accounts, such as checking, savings and retirement accounts.
- Eliminates the need for employees to pick up their paycheck when they are on vacation or otherwise away from the office.
If you use the RUN Powered by ADP® (RUN) platform, you can allow your employees to update their own direct deposit information via Employee Access®. And employees can find Employee Access on the ADP mobile app, making it really convenient for them to use.
Q: Can I require employees to use direct deposit?
A: In a majority of states, direct deposit is permitted only if the employee voluntarily authorizes it. Typically, the employee's consent must be in writing. While a few states permit mandatory direct deposit, states often list exceptions to the requirement. Employers should check their state law for compliance. Employers should also evaluate whether a mandatory direct deposit policy would disproportionately exclude members of a protected class, and if so, offer other options for the receipt of wages.
Q: When should I get employees' authorization for direct deposit?
A: Most employers seek authorization of direct deposit at the time of hire, when employees are filling out other new hire paperwork. Even if employees initially decline direct deposit, let them know that they can join at any time. You may want to remind employees of the direct deposit option at least annually, in case their circumstances or needs have changed.
Q: My state prohibits requiring employees to use direct deposit. Can I encourage them to use direct deposit?
A: Yes, employers may encourage employees to use direct deposit. To promote greater use, mention the benefits of direct deposit for employees, including the ones listed above.
Q: My company has a great relationship with a local bank. Can I require employees to have their pay directly deposited to that bank?
A: No. Employees have the right to receive direct deposit at a financial institution of their choice, regardless of whether your state permits mandatory direct deposit. Requiring employees to use a particular bank for direct deposit would violate certain laws.
Q: If I use direct deposit, do I need to provide a wage statement to employees?
A: Most states require employers to provide a wage statement to employees each pay period, regardless of whether wages are paid by paper check or electronically. In the absence of a specific requirement, it is a best practice to provide a wage statement each pay period.
Q: What happens with direct deposit if our payday falls on a federal holiday?
A: The Federal Reserve and banks will be closed on federal holidays, so direct deposits generally won't be posted to employees' accounts on that day. Keep in mind that some states require payment on the preceding business day, if a scheduled payday falls on a holiday. Absent such a requirement, employers generally have the option of paying employees on the business day before or after the holiday.
When your check date falls on a bank holiday and you wish to pay employees the day before, adjust your check date to avoid delaying payroll delivery.
Q: An employee quit. Can I provide their final pay via direct deposit?
A: Many states have rules about the location and method for final pay. Check your state law for details.
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Example: In California, the employee must receive their final pay at the place of discharge in the case of an involuntary termination. When an employee resigns or retires, California requires that employees receive their final pay at the office of the employer in the county they had been performing labor. Employees who quit or retire without providing a 72–hour notice are entitled to receive payment by mail, if they request and designate a mailing address. The date of the mailing constitutes the date of payment for purposes of the requirement to provide payment within 72 hours of the notice of resignation/retiring. In California, for both voluntary and involuntary terminations, an employee who has authorized final pay by direct deposit may receive final wages in this manner provided the other final pay requirements are met. |
Conclusion
Make sure your policies and practices regarding wage payments and direct deposit comply with federal, state and local laws.