What Laws Govern the Direct Deposit of Wages?

Adam Rust

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.

Other States

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.

Learn more about our employee direct deposit cards
Picture of card
balance, clock and open book symbolizing laws

Frequently Asked Questions (FAQ)

Q: What is needed to set up direct deposit?

A: You will need: Bank name, bank address, bank routing number, employee account number. You will want the signature of your employee verifying consent to receive pay to that account.

Q. How long does it take to set up direct deposit?

A: It depends. If you use a payroll card, you can do it in minutes. Give the employee the card, record the account number, and complete the necessary paperwork before the worker leaves the office. If the employee already has a bank account, then again it is very simple - just get the bank routing number and account number (along with bank name and address) from the employee. If your employee does not have a bank account and you do not have a payroll card program, then you will have to ask the employee to get an account. While the employee may be able to get the routing number and account number quickly, he or she will still have to wait to receive a debit card in the mail. Most workers are hesitant to accept pay to an account until they can get a debit card. Usually it takes four to eight business days for a card to arrive in the mail.

Q: What time does direct deposit hit?

Your bank should will probably credit your account at the end of the night prior to payday. For example, if your payday falls on Friday, then the bank should make the funds available in your account when they close their books at 11 pm ET on Thursday night. You should be able to ask your bank to send you an alert (text or email) when your funds become available for spending. The exception would be if your payday falls on the weekend. In that case, you may not be able to access your money until the start of business on Monday morning.

Q. Do I have to provide an employee with a paper pay stub if I pay by direct deposit?

A: You do not have to provide a statement of any kind (paper or electronic) In AL, AR, FL, GA, LA, MS, OH, SD, and TN. You must provide a statement of some kind, with detailed information on earnings and hours worked, in the following states: AK, AZ, ID, IL, IN, KY, MD, MI, MO, MT, NE, NV, NH, NJ, NY, ND, OK, PA, SC, RI, UT, WV, WI, and WY. You must provide the option of a paper statement, or give employees the ability to print a paper statement, in the following states: CA, CO, CT, IA, ME, NM, NC, TX, VT, and WA. You must gain consent (opt-out from paper) from workers to provide a digital pay stub instead of paper in the following states: DE, MN, and OR.

Q. Does Direct Deposit Cost Money?

Typically banks pay 5 to 10 cents to use an automated clearinghouse to process a payment. There are two systems to use ACH: the Federal Reserve's FedACH system and The Clearing House's Electronic Payment Network "EPN" system. Generally, the Fed serves smaller banks whereas larger banks use EPN. Each processes about half of all ACH payments.

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