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
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Updated to include the definition of reportable wages under paid family and medical leave final rules, and the forthcoming increase in the amount of wages payable to a deceased employee's estate and required pay deductions for long-term care benefits.
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Updated to reflect amendments regarding pay deductions for uniforms and equipment, effective May 1, 2019.
Updated to include forthcoming amendments regarding payroll debit cards and termination pay.
Federal and state laws affecting payment of employee wages by direct deposit.