Overview: Direct deposit has become the most popular way to pay wages due to a variety of advantages that make it a much more attractive option than paying wages via cash or check. Many employees have come to expect direct deposit to be a payment option because it is safe and convenient. Employers often prefer it because it may reduce paperwork and costs, and some have now gone a step further and made it a condition of employment.
Employers must comply with both federal and state laws in this area. The applicable federal regulations permit employers to require employees to use direct deposit as a condition of employment so long as the employees are permitted to choose where they want their funds to be deposited. Federal regulations also permit employers to require direct deposit at a certain financial institution only if they give employees the option to be paid by other means.
State direct deposit laws and regulations are generally more protective of employees. When state and federal laws conflict the general rule is that state law must be followed if it is more protective of employees' rights. Thus, multistate employers must check both federal and state regulations before making their direct deposit program mandatory. In most states, the following additional conditions must be met before an employer can pay employees via direct deposit:
Author: Rena Pirsos, JD, Legal Editor
Updated to reflect a forthcoming expansion of the pay statement requirements.
The FBI is warning employers of new email phishing scams targeting employees to gain access to their direct deposit information on the company's self-service payroll platform. Once the fraudsters obtain an employee's payroll portal credentials, the employee's direct deposits are rerouted to the scammer's bank account.
Updated to include the Maryland Healthy Working Families Act, effective February 11, 2018, and the forthcoming Maryland Small Business Retirement Savings Program.
Updated to include information on the Supreme Judicial Court of Massachusetts decision regarding payment of accrued sick leave on termination.
Updated to include an increase in the maximum wages payable to relatives of a deceased employee, effective December 29, 2017.
Updated to include pay frequency, pay statement and termination pay requirements of the Washington Paid Sick and Safe Leave Law, effective January 1, 2018, and the forthcoming state Small Business Retirement Marketplace.
Updated to include pay frequency requirements for fast food employees under the New York City Fair Work Practices ordinances, effective November 26, 2017, and the safe time amendments to the New York City Earned Sick Time Act.
Federal and state laws affecting payment of employee wages by direct deposit.