For a lot of employers, there’s no question that paying your employees through direct deposit into their bank accounts, versus a paper check, is a lot easier. Saving money and resources that would go to paper supplies, and time and efficiency through simplifying payroll, means it’s a payment option for many.

But is it legal to make it your employees’ only payment option?

The possibility that your employee might prefer receiving a paper check aside, the answer depends on where your workplace resides.

Federal Law

Under federal law, any workplace that uses direct deposit is protected by the Electronic Funds Transfer Act (EFTA), which states that it’s legal for an employer to enforce mandatory direct deposit, provided that one of two requirements have been met.

• The employee chooses the bank they receive their funds into;
• The employer gets to choose the bank, provided they offer an alternate payment option to the employee, such as a paper check, cash, etc.

State Law

While mandatory direct deposit may be legal under federal law, state law, on the other hand, widely varies. Every state is different – some say it’s legal, some say it’s not, and some allow mandatory direct deposit provided certain clauses like written statement opt-outs, and special rules for private employers, certain sectors, and industries are observed.

California, for example, allows mandatory direct deposit, so long as the employee gets to choose the bank and has given written consent.

If the state has any explicit laws regarding direct deposit, that law takes precedent over federal law. It’s only when the state doesn’t have an opinion that the employer is thereby allowed to follow federal law on mandatory direct deposit.

So, be sure to check your specific state laws and/or seek legal counsel before eliminating any payment options available to your employees!

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