If you’re like over 93% of Americans, you get paid by direct deposit, meaning funds are electronically transferred directly into your bank account, with no checks or cash changing hands.
But did you know that in some states in the nation, it’s not your choice whether or not you get paid this way? Some businesses are allowed to require that their staff be paid by direct deposit. From the employer’s point of view, this can be a real advantage. It means they don’t have to go to the time and expense of cutting checks. Everything can be automated. Some workers, though, might not love this policy, as they might be unbanked or prefer not to share their account details.
Here, you will learn more about this topic, including:
• What is direct deposit?
• Which states allow employers to require direct deposit?
• What are ways to accept direct deposit?
• What are the pros and cons of direct deposit?
What Direct Deposits Are
First, consider what a direct deposit is and how it works.
• 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 (ACH) 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. It can sometimes take some time for a check to clear; several days even.
Because it does away with a lot of cumbersome paperwork, direct deposit has become more and more popular. 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, the answer to, “Can employers require direct direct deposit?” may be yes. 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 direct deposit laws by state; these are the states that allow some form of mandatory direct deposit.
|Mandatory Direct Deposit Allowed?
|Which Employers Does This Rule Apply To?
|Yes for private sector, no for public sector
|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.
|Public sector, state government
|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
|Yes for private sector and state government
|All employers under different circumstances
|Private employers with at least five employees
|Private employers except for those involved in farm, dairy, agricultural, viticulturally, or horticultural pursuits; stock or poultry raising; household domestic service; or other employment in which a written agreement provides different terms.
|Yes for state higher education institutions. No for employers subject to the state Wage Payment and Collection Act.
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Why Some States Allow Required Direct Deposit
In some states, it is believed that direct deposit is a reliable payment method. Its benefits are that payment arrives on time in a secure way. There are no checks for employees to worry about depositing or that could be lost.
Employers who want to make direct deposit mandatory must meet federal requirements for allowing the employee to choose which bank receives the deposit or the employer may determine the bank. In the latter situation, the employer would also have to offer the option of payment by check or cash.
Can You Be Fired for Refusing Direct Deposit?
In some cases, an employee may want to refuse direct deposit. This could be because they are unbanked. Trying to force a person to accept direct deposit could be unintentional discrimination. This situation could require a case-by-case review.
If you feel you don’t want direct deposit and are being forced to do so, it may be worthwhile to check with your HR department about possible work-arounds.
4 Ways to Accept Direct Deposit
There are several ways to accept direct deposit. Consider these options.
You can have direct deposit go into a checking or savings account. Typically, you’d fill out your banking information (such as your account and routing number) with your payroll department and perhaps provide a voided check.
You may be able to direct some or all of your direct deposit to an investment account.
Prepaid Debit Cards
You could send direct deposit to a prepaid debit card, such as American Express’ Bluebird Card.
If you are receiving direct deposit, another option could be to have it go to a payment app, such as PayPal or Cash app.
Recommended: What If Direct Deposit Goes to a Closed Account?
Advantages of Direct Deposit
Whether or not direct deposit is required, there can be some distinct upsides for employers and employees.
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.
You may also be able to send some of your paycheck to a savings account, which is a way to automate your savings.
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.
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.
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.
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.
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 and bank fraud. 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 or another acceptable way to receive the funds, such as a payment app. Then, follow these steps:
• To receive electronic payments, you will likely provide your 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 for checking accounts, 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.
• Your employer may ask you for other information, such as the name of the account holders on your checking or savings account (if you are using one), 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.
Opening a SoFi Checking Account
Speaking of divvying up earnings to meet specific needs, SoFi Checking and Savings is a good candidate for that — plus much more.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Can you deny an employee direct deposit?
Whether or not direct deposit must be offered is a matter of state law. If direct deposit is required, then an employer must offer it.
Can you be fired for not having direct deposit?
When an employer wants to use direct deposit but an employee doesn’t want to accept that form of payment, there may well be a work-around, such as getting paid by a payment app. Finding a solution in this way can keep a situation from getting to the point of an employee thinking about quitting or an employer wondering about taking action.
Which states allow mandatory direct deposit?
In certain circumstances, employer direct deposit laws make it mandatory in Alabama, Alaska, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, North Carolina, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, and Wisconsin.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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