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What States Allow Employers to Require Direct Deposit?

December 30, 2020 · 5 minute read

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What States Allow Employers to Require Direct Deposit?

Direct deposit can be a fast and easy way to receive your paycheck. You don’t have to go to a bank to deposit the check, risking loss or theft on the way. And the money is often available right away.

It’s also a popular choice: More than 93% of Americans receive their paychecks via direct deposit.

Many employers prefer not to issue paper checks, because doing so can be time consuming and costly.

So employers may want their employees to make the switch to direct deposit, and in some states they can actually make this form of payment mandatory.

Direct Deposits are Electronic Payments

First, let’s quickly define what a direct deposit is. A direct deposit occurs when money is moved from one bank account to another without the use of a physical check. For example, an employer might shift money from its bank account to an employee’s bank account on payday.

Banks use the Automated Clearing House network to coordinate electronic payments and other automated money transfers between financial institutions.

When you receive a direct deposit, money goes directly into your bank account, without the need for any intermediary steps, such as accepting the transfer, as you would if you were to deposit a check.

The money is cleared automatically through the ACH and is available immediately. With paper checks, banks might put a temporary hold on the funds while they wait for the check to clear.

Because it does away with a lot of cumbersome paperwork, direct deposit has become more and more popular. Consider that in the second quarter of 2020, there were 6.6 billion transactions through the ACH network, up nearly 8% from the year before.

Direct deposit is not only used to transfer paychecks from employer to employees, but also for things like tax refunds and payments from retirement accounts.

Some government agencies have done away with direct deposit entirely. The Social Security Administration, for example, no longer cuts paper checks, and requires people to accept their benefits via direct deposit or a reloadable debit card.

Which States Allow Required Direct Deposit?

Depending on state law, employers may be allowed to require that employees accept paychecks through direct deposit. State law is not always cut and dried, however.

The rules may depend on whether an employee works in the public sector or for a private company. And rules may not apply to all employers equally.

Here’s a look at the states that allow some form of mandatory direct deposit.

State

Mandatory Direct Deposit Allowed?

Which Employers Does This Rule Apply To?

Alabama Yes for private sector, no for public sector All employers
Arizona Yes All employers
Indiana Yes All employers
Iowa Yes, for employees hired after July 1, 2005. Employers may not require direct deposit if the cost to employees of setting up and maintaining a bank account effectively reduces their wages to below minimum wage. All employers
Kentucky Yes All employers
Louisiana Yes Public sector, state government
Maine Yes All employers
Massachusetts Yes All employers
Michigan Yes All employers
Minnesota No for private sector employees, but the commissioner of labor and industry may require direct deposit for public sector employees. All employers subject to state statutes
North Carolina Yes All employers
North Dakota Yes All employers
South Dakota Yes All employers
Tennessee Yes Private employers with at least five employees
Texas Yes Private employers, except those involved in agriculture or horticulture, household domestic service, or other employment in which there is a written agreement that provides different terms
Washington Yes All employers
West Virginia Yes for state higher education institutions. No for employers subject to the state Wage Payment and Collection Act.
Wisconsin Yes All employers

Advantages of Direct Deposit

Whether or not direct deposit is required, there can be some distinct upsides for employers and employees.

Convenience

Direct deposit takes a lot of the legwork out of receiving a paycheck. The funds are deposited automatically and regularly, requiring no trips to the bank or mobile deposits. You don’t need to be home to receive the check. So if you’re on vacation or working far from your regular stomping grounds, your check will go through without lifting a finger.

Organization

Keeping track of paper checks can be a pain for employers and employees, who may end up having to file away hard copies of records, such as pay stubs, for future reference. Electronic transfers provide a paperless transaction history that both parties have access to. The transaction history doesn’t need to be stored in a physical place, so it can be referenced from anywhere at any time.

Resource Saving

Sending money via the ACH is often cheaper for employers than printing and mailing paper checks. Generally, it is free for employees to receive payment through the ACH. It’s also greener, allowing businesses to cut back on the amount of paper, ink, and energy that they consume.

Security

It is possible for paper checks to be lost or stolen, and even for someone to fraudulently cash them. Issuers may charge a fee to replace lost checks, and the process of stopping payment on stolen checks may be slow and expensive.

Generally speaking, direct deposit provides a safer alternative for transferring cash since there is no physical item to be lost or stolen.

There are some potential security issues when setting up direct deposit, as banking information must be exchanged between employees and employers. Making sure that the information is passed through secure channels to a person you can trust can help ensure that direct deposit is set up securely.

Speed

How long does a direct deposit take? The swiftness of direct deposit transactions is one of the key benefits. Money often hits your account nearly immediately after a transaction is made. And transactions usually occur at midnight the night before payday, meaning direct deposits may arrive in an employee’s account long before a paper check would arrive in the mail.

Disadvantages of Direct Deposit

Despite the benefits of direct deposit, there are some reasons that the process can be disadvantageous.

Costs and Fees

In some cases the cost of opening and maintaining a bank account can be burdensome for employees, reducing the amount of their take-home pay. Iowa protects against this possibility by disallowing mandatory direct deposit if it becomes a financial burden.

Lack of Attention

Because direct deposit is automatic, you may forget to check deposits in your bank account regularly. That means that if any problems occur, they may go on for a long time before you catch them.

You can avoid this issue by setting up alerts with your bank every time you receive a deposit to quickly see if everything is correct, and if not, nip any problems in the bud.

Cyber Threats

Though direct deposit provides a relatively secure way to transfer money, that doesn’t mean it’s immune to cyber criminals looking to steal sensitive financial information. Protections against cyber threats include using complicated passwords and password protection and avoiding phishing scams that might give fraudsters access to emails and data.

Setting Up Direct Deposit

To set up direct deposit, you must first have a checking or savings account. To receive electronic payments, you must provide your bank account information to your employer.

There may be a specific form that you are asked to fill out, you may be asked to provide a voided check, or you may simply be asked to provide your account information in an email.

Once again, always be sure you are sending your information to someone you trust and through a secure channel. You may want to avoid sending sensitive information, like account numbers, through email, instead handing information directly to a person or providing it over the phone.

Typically you’ll need to let your employer know whether your deposits will be going into a savings or checking account.

Your employer may ask you for other information, such as the name of the account holders on your checking or savings account, your mailing address, and your Social Security number.

Employees can list multiple accounts for direct deposit, which can help them accomplish their financial goals. For example, a worker could direct a portion of the paycheck to a checking account and another to a savings account. That way savings are automated while ensuring that enough is in checking to cover bills.

Speaking of divvying up earnings to meet specific needs, SoFi Money® is a good candidate for that—plus much more. It’s a cash management account that offers vaults for particular goals.

It has no account or in-network ATM fees, provides cash-back rewards on spending, and can earn interest.

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