Can You Make Direct Deposit Mandatory?

A question we’re often asked when a new small or medium-sized client chooses us for payroll outsourcing is whether or not they are able mandate that their employees use direct deposit for their paychecks. With over 82% of US employees choosing to be paid by direct deposit, it’s clearly extremely popular. In all honesty, there’s very few reasons why employees would choose otherwise. However when it comes to the question of whether or not a business can make direct deposit mandatory, the answer is… maybe. Keep reading!

Federal Direct Deposit Laws

Federal regulation E, The Electronic Fund Transfer Act (EFTA), allows employers to mandate direct deposit for an employee so long as that as employee can choose whichever bank he likes to receive his wages. If the employee is not allowed to select the bank of their choosing, employers must offer to provide wages in other forms of payment, such as cash or a check. So the answer on the federal level is yes – you can mandate direct deposit to your employees. However, if you’re a business owner, you’re no doubt already well aware that you must also comply with all state laws. We’ll cover those next!

State Direct Deposit Laws

States can be a littler more restrictive when it comes to mandating direct deposit. In Virginia, employers cannot require direct deposit. In Kansas, Indiana, Texas, Missouri and South Carolina, businesses may require direct deposit for their employees but only if they have a bank account – those without bank accounts must be offered payroll cards, cash, or checks. Meanwhile, in California, New York, New Jersey, Florida, Vermont and Illinois, businesses are required to get, in writing, permission from their employees in order to pay them in direct deposit. While this isn’t mandatory in every state, it’s definitely good practice – and something that we advise all of our clients to do regardless of state law. And in another example, Utah state law says that employees cannot refuse direct deposit for their wages if:

  • In the prior year, the employer’s annual federal payroll tax deposits amounted to at least $250,000, and;
  • At least two-thirds of the employer’s workers are being paid by direct deposit.

States without codified regulations on direct deposit usually just adopt the provisions of Regulation E. In such a case that the state offers additional protections to employees, the employer must use whichever law offers the employee the most benefits.

Determining Your Eligibility to Require Direct Deposit

The best way to determine whether your state allows your business to require direct deposit (and under what conditions) is to examine its current wage payment statutes. If that doesn’t sound like too much fun… it’s time to consult with the professionals. Capital Payroll Partners is well-versed in all things payroll, including determining direct deposit requirements in each state. We are able to quickly and easily (and on your end, automatically) determine the proper conditions and procedure to get direct deposit set up for your employees – whether you’re a small, medium or enterprise level business. We’d love to be your payroll partner! Get in touch using the form below or get an instant free price quote!

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