Direct Deposit Laws by State

Many employers (and employees) prefer to use direct deposit for sending and receiving paychecks. There are a host of benefits to this approach, including cost savings, immediate access to funds, improved security, and easy correction of pay discrepancies. Even so, some workers still favor physical paychecks and employers must be aware of the federal and state laws that dictate whether their business can legally mandate direct deposit as the company’s sole payment method or must accommodate employees who wish to receive paper checks.

In this article, we’ll provide you with all of the information you need regarding federal and state payroll direct deposit laws so you can choose a payment system that is legally compliant and works for businesses.

Federal Direct Deposit Laws

The Electronic Funds Transfer Act (EFT) outlines federal policy related to electronic payments and direct deposit of payrolls. Within the EFT, Federal Regulation E specifically articulates the protocols and standards employers must adopt when using direct deposit or other electronic payments like pay cards to compensate their employees.

The Act requires that employers complete all of the following steps before instituting direct deposit payments for an employee:

• Collect an employee-signed authorization statement with all relevant banking and bank account information
• Provide each employee a summary of their rights and liabilities while using direct deposit payroll payments

EFT states that employers can require employees to accept direct deposit as a payment method, as long as employees are granted the right to select the banking institution that accepts the deposit.

Many states have direct deposit and electronic payment policies that duplicate or closely mirror the provisions in Regulation E. However, some states provide more comprehensive protections to employees that can complicate company-wide practices for employers. For instance, some states place explicit prohibitions on mandatory direct deposit, employee processing fees, and/or requirements to produce pay statements to accompany deposits.

State Direct Deposit Laws

In some cases, Payroll Direct Deposit (PDD) laws exactly reflect federal law. In other cases, they add extra restrictions, exceptions, or conditions. Based on where your business is located, you should familiarize yourself with the state laws that could impact your own payroll practices.

States That Duplicate Federal Law

Eight states lack state PDD laws that modify conditions outlined in the EFT Act and Federal Regulation E. This includes the following states: Alabama, Georgia, Hawaii, Louisiana, Massachusetts, Mississippi, Nebraska and Ohio.

States That Permit Mandated Direct Deposit

Nine states have adopted state laws that permit employers to mandate direct deposit as a payment method as long as the conditions align with federal law. This includes the following states: Indiana, Kansas, Minnesota, Missouri, South Carolina, Texas, Virginia, Washington, and West Virginia.

States With Unique PDD Terms and Conditions

A few states have notably unique policies that fall outside of the other categories we’ll explore. For instance, employers in Utah can only mandate direct deposit if they pay $250,000 or more in state payroll taxes or can demonstrate that two-thirds or more employees agree to direct deposits. Arkansas and Arizona also have distinct conditions regarding acceptable payment types and forms of written consent, which can be explored in the chart included in this article.

States That Require Employee Consent

Twenty-one states, including Florida and Illinois, mandate that an employee must agree to direct deposit before an employer can institute payments via direct deposit. In some cases, this agreement must be made in writing. 

Other Considerations 

Although we’ve outlined the four major categories of state PDD policy, some states have specific conditions regarding employee processing fees, qualified deposit-receiving institutions, the use of pay cards, and pay stub access for employees.

Regarding pay stub access for employees, employers should prioritize keeping diligent payroll records. Some states require that employers provide physical or digital pay stubs for each deposit, but all employees have the right to request payroll records through the Fair Labor Standards Act (FLSA).

To take a closer look at the PDD requirements specific to your state, please explore the table below:

Optimize Payroll and Direct Deposit

When employees have easy access to their funds and pay stubs, they spend less time on banking and more time impacting your organization's bottom line. Find comprehensive payroll solutions to help you streamline PDD, legal compliance, and synchronize payroll with other key HR and HCM functions.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.