Everyone loves payday! And with each passing year, more and more employees seem to love direct deposit. According to a 2022 American Payroll Association survey, more than 93% of U.S. workers are paid by direct deposit. That’s quite a jump from 74% in 2011.

And employers love it too. It saves time on payroll-related tasks, saves money on printing and mailing and eliminates such security risks as stolen checks and forged signatures.

Is Mandatory Direct Deposit Legal?

Given its popularity and the advantages it provides to employers, direct deposit is encouraged by many companies. In fact, some even require it. But can they? The answer is — like most things HR-related — it’s complicated. Some states have a law for or against mandatory direct deposit; if the state does not have laws on direct deposit, federal law applies…but even that has some conditions.

Federal Law on Mandatory Direct Deposit

The Electronic Fund Transfer Act (EFTA), also known as Federal Regulation E, permits employers to make direct deposit mandatory, as long as you do one of the following:

  • Allow each employee to choose the bank that his or her wages will be deposited into.
  • Choose the bank that your employees must use for direct deposit, but also offer another means of payment, such as cash or paper check.

State Law on Making Direct Deposit Mandayory

In some states, an employer can make direct deposit mandatory, provided certain stipulations are met. For instance, employers in Kansas, Indiana, Texas, Missouri and South Carolina can require employees to accept direct deposit, but the employer must provide another payment method — such as payroll card, cash or check — to employees who do not have a bank account.

In many states — including California, New York, New Jersey, Florida, Vermont and Illinois — employers must obtain written permission from employees in order to pay them by direct deposit. A good rule of thumb is to require written authorization from the employee, even if state law doesn’t say to.

You can determine your state’s stance on direct deposit by examining its wage payment statutes, which may also require that you give employees a pay stub each time they are paid — whether by direct deposit, check, cash or payroll card.

Of course, this is just a summary of complex state rules, which may contain additional provisions and exceptions, and — as is often the case with state laws — can change frequently. Be sure to get professional advice on the current rules in your jurisdiction before implementing a policy at your business.

Want to learn more about direct deposit, payroll in general or any other human capital management (HCM) issues? Contact Accu Data today. We’re happy to answer any questions you have!