By Susan Prince, JD, Legal Editor

Companies love direct deposit and often want to mandate it for their employees. Why? It’s cheap and easy. Employers can save over a dollar per payment by using direct deposit instead of checks. The benefits of direct deposit to both consumers and companies are numerous. This is why most large companies (100+ employees) offer direct deposit, and it has become a staple in today’s employee benefit packages.

Direct deposit is the electronic transfer of a payment from a company or organization into the checking or savings account of employees, retirees, taxpayers, vendors, or shareholders. The payment can be divided among several different accounts and, in many cases, between different financial institutions.

Direct deposit is safe, confidential, convenient, and fast. Typically, employees who use direct deposit receive their pay in their bank accounts the evening before payday. The most popular application of direct deposit is for payroll, but it can also be used for many other types of payments, including:

• Annuities
• Bonuses and commissions
• Dividend and interest payments
• Pensions
• Travel expense settlements
• Other expense reimbursements
• Vendor payments
• Tax refunds
• Social Security or other government payments

Employers often question whether they can require all of their employees to use direct deposit. In some states, employers may require employees to use direct deposit, but there are often conditions attached to the requirement such as allowing the employee to choose the financial institution to which the money will be deposited.

In other states, mandating direct deposit is prohibited and the written permission of the employee is required before direct deposit is allowed. It is important for an employer to check state law before requiring direct deposit.

A company of any size can offer direct deposit to its employees. Many payroll software packages, as well as independent processors, provide a direct deposit formatting feature. There are also a number of reasonably priced PC software packages in the marketplace today.

Your financial institution is a great resource for more information on setting up and using direct deposit. Many financial institutions also offer free checking or reduced account fees to consumers who use direct deposit. Check with your financial institution to find out its policies.

Susan E. Prince, J.D., is a Legal Editor for BLR’s human resources and employment law publications. Ms. Prince has over 10 years of experience as an attorney and writer in the field of human resources and has published numerous articles on a variety of human resources and employment topics, including compensation, benefits, workers’ compensation, discrimination, work/life issues, termination, and military leave. Ms. Prince also served as an expert on several audio conferences discussing the 2004 changes to the federal regulations under the Fair Labor Standards Act. Before starting her career in publishing, Ms. Prince practiced law for several years in the insurance industry and served as president of a retail sales business. Ms. Prince received her law degree from Vermont Law School.

Follow Susan Prince on Google+