Why is direct deposit generally considered the best way to pay an employee?

Author: Ryan F. Donovan

Payment via check or any other physical means has drawbacks. An employee enrolled in direct deposit does not typically have to make trips to the bank after every payday since the money is deposited electronically. This can cause implications for an employee who works in a rural area or whose bank is not convenient to home or work, or if there is inclement weather that inhibits the ability of an employer to hand out paychecks or the ability of employees to come get them.

There are some drawbacks to direct deposit as well. Most states abide by the national NACHA (The Electronic Payments Association) guidelines that permit an employer to reverse a direct deposit within five business days of payday. Additionally, processing for payrolls with direct deposit is supposed to occur three business days in advance of payday. These two facts generally allow up to two weeks of lag time between the day a direct deposit amount is processed and the time limit for when it can be reversed. Some direct deposit reversals, especially those processed after a direct deposit is released, may fail due to the bank refusing to return the funds or insufficient funds existing in the account to allow for the reversal. One other consideration is that some states explicitly outlaw reversing direct deposits unless the employee agrees to the reversal in writing.