Is Mandatory Direct Deposit Legal? Learn Your State Requirements
More than 80% of employees receive their paycheck by direct deposit. But some workers can’t because they don’t have a bank account. Or they still prefer a paper check. With advantages for employers like time and cost savings, greater security, and increased satisfaction thanks to the convenience and reliability of automated transfers, you may want to make direct deposit mandatory. But is that legal?
At Complete Payroll Solutions, I’m one of the experts on our compliance team that guide businesses throughout the Northeast on federal and state labor and employment laws like those that govern pay. I’ve put together this overview of the laws in place that prohibit, limit or allow employers to pay by direct deposit. Let’s start with the federal Electronic Fund Transfer Act (EFTA).
How The Federal Electronic Fund Transfer Act Impacts Mandatory Direct Deposit
The EFTA is a federal law enacted in 1978 to protect consumers when funds are transferred electronically. In addition to transfers made by ATMs, phone, and debit cards, it also governs direct deposit. Under the EFTA, employers can require direct deposit if one of the following conditions is met:
- The employee can choose the bank
- The employer chooses the bank but offers another payment method
Yet even though the EFTA permits mandatory direct deposit, your state may not. And that’s where things can get tricky. Each state may have different laws in effect that could affect your ability to require direct deposit. Since most of our clients operate in the Northeast, next we’ll review state laws governing pay in the region to give you some specific guidance. If you’re outside of the Northeast, it’s best to consult the local laws in your area to make sure you’re in compliance.
How State Laws In The Northeast Affect Mandatory Direct Deposit
If you’re not familiar with your state’s employment laws and regulations, you can generally find them online or through your labor department. You’ll want to review the sections that cover payment of wages. In some cases, a state may not have a law governing direct deposit, in which case you’d simply follow the EFTA requirements. However, if you operate in a state with specific direct deposit laws, then you’ll need to follow them.
Here’s a summary of how states throughout the Northeast treat direct deposit.
- Connecticut: You can’t require direct deposit in Connecticut. However, you can pay your employees this way if they request it.
- Maine: Employers in Maine can require direct deposit. Workers simply have to be able to make an initial withdrawal of the entire net pay without incurring additional costs.
- Massachusetts: State law doesn’t expressly address direct deposit nor whether employers can require it. However, the state guide on pay and recordkeeping says that employers may require direct deposit. Employers just can’t choose the bank where employees will receive the funds.
- New Hampshire: Employers can’t mandate direct deposit; workers must authorize it in writing. And there cannot be a charge to those employees who opt to be paid by direct deposit.
- New York: New York employers can’t require direct deposit but can pay by this method with an employee’s advance written consent. However, this doesn’t apply to employees in exempt executive, administrative, or professional capacities who earn over $900 a week or those working on a farm.
- Rhode Island: Mandated direct deposit is not allowed. It is only permitted if an employee requests this method of payment in writing.
- Vermont: Vermont employers can’t mandate direct deposit. Employers must receive written authorization from an employee to pay by this method.
Ready To Switch From Paper Checks?
Paper checks are losing ground to direct deposit because of the benefits the automated transfers offer. But before you instruct employees they have to make the switch, be sure you know if mandatory direct deposit is legal in your state to avoid the risk of penalties. Review your state laws for details or contact our compliance team, who can advise you on the legality of mandatory direct deposit for peace of mind.
If you can’t mandate direct deposit, there are other alternative pay methods we can help you with. Read our resource on emerging pay options to learn more.