The popularity of direct deposit has increased significantly over the last few years, but is it right for everyone?
Direct Deposit – Is it really that simple?
Direct Deposit - we all know what that is. The ability to pay employees or sub-contractors by automatically depositing pay directly into a checking, savings or money market account at any financial institution. Direct deposit provides both the employee and the employer with benefits. The employee receives the convenience and immediate access to funds and eliminates the possibilities of lost or stolen checks.
For employers’ concerned with their carbon footprint, benefits are derived from issuing fewer paper checks (paper and ink). One study, from January 2009, conducted by NACHA's Marketing Management Group (based on US companies saving $605 million annually by switching employees to use Direct Deposit) indicates that an employer can save an average of $176 per employee, per year by switching to Direct Deposit. The biggest benefit to the employer is the reduction of opportunities for fraud through tampered or counterfeit checks.
We can all agree that direct deposit increases both the timeliness and security of the payment.
Basics of the direct deposit process.
Almost every payroll service, and most payroll software (including QuickBooks payroll options-read our recent article on Intuit Payroll) offer direct deposit as an option; in these cases an electronic file is transmitted to the processing bank either from the payroll service or payroll software. Many banks also offer a direct deposit option which allows their regular customers to configure direct deposit payments through their normal electronic banking log-in procedures. In almost all cases there is a processing fee charged by either the bank, the payroll service or the payroll software vendor. Each employer should determine if these costs off-set the savings generated from other benefits.
So what are the drawbacks of direct deposit?
There are a number of potential drawbacks to direct deposit. First, it requires additional work. The employer must continuously update their master employee file with direct deposit account numbers and must routinely monitor the electronic payments to ensure that terminated employees are not receiving payments. Employers with high turnover rates may decide that this process is too cumbersome to maintain.
Second, direct deposit is not a paperless system as most might think. Employers must create a process that includes an employee authorization form that allows the employer to deposit funds into the employees account. Additionally, it is possible to create a stop order on a check issues incorrectly and much harder to retrieve funds from an incorrect direct deposit.
Third, the employer loses the cash flow benefit of paychecks. With paper checks, employee funds remain in the employer’s bank account until the check is processed by the bank. This process typically takes 2 – 3 days. Direct Deposit shortens the time the employer has the funds as there is typically a minimum of 48 hours processing time required.
Finally, some employees may not have bank accounts (poor credit history) or simply may not desire to have their paycheck direct deposited. Pay cards have become a great solution for this. The employee’s pay is direct deposited to this pay card that typically works just like a visa/master card debit card.
What rules and regulations govern direct deposit?
Numerous rules and statutes govern direct deposit both at the federal and state level. At the federal level, the Federal Reserve Board Regulation E (12 C.F.R. part 205) sets forth certain consumer protection right that apply to EFTs. Direct deposit programs are also regulated under the Electronic Funds Transfer Act (Pub. L. No. 95-630, 92 Stat. 3641). At the state level, things become more diversified depending upon your state of record. Each state regulates the payment of wages and, as a result, can establish restrictions on the manner and place at which employees can be paid. Common regulations require that employers (1) obtain employee’s written, voluntary consent, (2) give employees the choice of financial institution, and (3) ensure that the employees are entitled to a free withdrawal of their wages.
While direct deposit offers a lot of benefits for both employees and employers, it is not always the best option for everyone. Take time to consider direct deposit requirements, methods and costs before simply signing-up.