From direct deposit to paycards: E-pay options abound

April 28, 2016

More than halfway into the second decade of the 21st century, it should come as no surprise that most employees have their pay deposited directly into their bank accounts. Most isn’t all, however, and that doesn’t include employees without bank accounts. For employees in that latter category, stored-value debit cards, familiarly known as paycards, are the answer. Or maybe not.

Direct deposit or smartphone? Millennials and Gen Xers do everything on their smartphones and their banks are happy to play along, with apps that allow them to deposit paper checks remotely. And that’s a real threat to your efforts to get all employees into direct deposit.

For new hires, one tried-and-true tactic is to ignore their smartphone apps and include direct deposit enrollment forms as part of the routine paperwork—W-4s, I-9s, etc.—they must complete. For everyone else, you can point out that there are many more ways that employees’ identities can be compromised with smartphone apps than there are with direct deposit.

Remember: As a rule, you can’t force employees into direct deposit.

CHECK, PLEASE: Regardless of your best efforts, some employees may never buy into direct deposit. NACHA, the electronic payments organization that represents banks, has a website full of ideas you can use to coax resistant employees. For more information, point your browser to

Find and fix direct deposit errors. Employees will run right back to their smartphones if repeated mistakes hinder their ability to reach their pay. You can avoid the most common problem—employees’ pay wasn’t deposited—by having them provide you with voided checks when they enroll (deposit slips won’t do), double checking that the surnames on their bank accounts match the names in your payroll and personnel records and reminding employees to notify you immediately if they change direct-deposit-linked banks or accounts.

Fixing other errors is more complicated, however, because you’ll have to work with your bank to reverse the electronic transaction. Reversals may be necessary if an incorrect amount or duplicate amount was deposited. Reversals should be initiated immediately upon discovering the error.

Paycards. Under federal Regulation E, you can’t force employees into a paycard program, unless you first give them the choice of paycards or direct deposit, but state laws generally require voluntary participation in paycard programs. All states require that employees paid by paycard be able to cash out their entire net pay fee-free. Landmine: Since employees must have access to their entire net pay fee-free, don’t load pay onto employees’ personal general purpose debit cards that they present to you. Reason: Confusion (and lawsuits) will arise, since general purpose cards are subject to the full array of fees. Here are some tips to keep your paycard program on track.

  • Review the payment options with new hires in person; have them sign acknowledgments that all payment options were explored and that they have voluntarily consented to paycards before the first payday
  • Make opting out of a paycard program as easy as possible and reassure employees that they won’t be retaliated against for doing so
  • Avoid card issuers that provide cash incentives to employers or overdraft protection to employees
  • Offer paycards that are widely accepted at surcharge-free ATMs and cards that come with courtesy checks, no-frills bank accounts and online bill paying
  • Provide employees with appropriate disclosures and ensure that they understand them, especially when fees can be charged; compile employees’ questions into FAQs, which everyone can then access.

STATE LAW CHECKUP: As we said, states usually require that employees voluntarily participate in electronic pay programs. This month’s chart summarizes the states’ direct deposit/paycard rules. “Mandatory” means that a state allows you to make e-payment a condition of employment, if you choose. States that don’t have laws aren’t included.