Did you know that states have laws governing how companies set up direct deposit of wages? It is not just that there are federal laws in place that must be followed. Most states have established separate regulations, as well. Notably, rules vary from state to state. Think of federal law as the minimum standard, as they will be applicable even in states where there are no rules on the books surrounding this question. But Additionally, if your state does have its own rules, you will have to follow both state and federal law. State laws expand upon the federal codes.
Some states allow employers to require that their employees accept pay by direct deposit.
The basic principle to bear in mind is to let your employees choose if they want to use direct deposit, and if they do, to let them pick the account that they receive their pay. In many states, employers have more power, but in any state, the practice of employee choice works best. A caveat to the information in this article is that employees of government agencies frequently receive different treatment under state and federal law. In many cases, governments have more rights in asserting their interests in the payment of wages through direct deposit.
Let’s review the legal playing field across the United States:
Federal Laws Covering Payroll Direct Deposit
Federal law acts as a baseline minimum. Even businesses operating in states with no rules relating to direct deposit still have to follow federal law.
Although it might be simpler, employers cannot require its employees to receive their wages by direct deposit at the same bank where they bank. However, no federal law prevents an employer from requiring direct deposit as long as the employee has the choice to pick his or her receiving bank.
States That are Silent on Direct Deposit
Some states have not indicated their position on this question. In effect, that means that state law would not interfere with an employer’s decision. Of course, federal laws still apply here.
AL, GA, HI, LA, MA, MS, NE, and OH
States that Allow Employers to Require Direct Deposit
Nine states will allow a company to mandate direct deposit. However, those states make an exception in cases where an employee doesn’t have a bank account. For those workers, businesses in these nine states must allow unbanked employees to receive pay in cash, check, or with a payroll card.
If an employer in one of these states can compel its unbanked employees to sign up for accounts in a way that still comports with laws (by making it voluntary), then it can increase the uptake of direct deposit.
IN, KS, MN, MO, SC, TX, VA, WA, and WV
States that Require Employee Consent
In twenty-one states, employers must secure the approval from workers before they can set up a direct deposit.
AK, CA, CT, CO, DE, FL, ID, IL, IA, MD, MT, NH, NJ, NY, NC, ND, OK, PA, RI, VT, and WY
Except in Idaho, New Hampshire, New Jersey, New York, and Montana, employers in these states cannot specify which bank an employee uses to receive payments.
In Arizona, an employee can be required to receive wages electronically. The rule is that the employee may select their bank, or short of that, the employer can pay wages via an electronic pay card. In Arkansas, if an employee states in writing that he or she would prefer to receive their pay via a check, then their request must be honored. In Utah, large businesses (more than $250,000 in annual payroll tax expenses) can require a direct deposit. Alternatively, if two-thirds of any firm’s employees agree to direct deposit, then the employer can mandate that all workers must take their pay via direct deposit.
Some states have additional rules governing the payment of wages.
If you have any doubt about how a rule would apply to your business, then your best bet is to let the employee decide. It is acceptable to encourage workers to sign up for direct deposit in any state.
As with any law, the rules are open to interpretation. Your situation may vary, and as a result, it is always best to consult a lawyer.
Source: Integrity HR.
Note: You should always refer to a lawyer when seeking any legal advice. You should not consider WiseWage to be a source of legal advice. Laws can change and they are all open to interpretation.
Additionally: we have published an exstensive FAQ on payroll cards on our "For Employers" page.