• How Can I Pay My Employees? Let Me Count the Ways
  • November 6, 2013
  • Law Firm: Shawe Rosenthal LLP - Baltimore Office
  • In addition to issuing a paper check, there are other means by which employers might pay wages to their employees, such as direct deposit and payroll debit cards. Paper checks or even cash are always permitted, but the use of direct deposit or debit cards may be subject to legal requirements and restrictions under state and federal law.

    Under the federal Electronic Funds Transfer Act, employers can require employees to use direct deposit if the employee is permitted to select the institution that receives the deposit. State law, however, may limit this employer right. For example, Maryland permits the use of direct deposit, but only with the consent of the employee. Thus, employers in this State, as well as a number of others, cannot require direct deposit as a condition of employment. Other states do permit employers to mandate direct deposit. The state laws, however, generally do not prohibit employers from seeking to incentivize employees to use direct deposit. For example, employers could use some minor benefit - like a gift card - to encourage employees to sign up for direct deposit. Conversely, employers might be able to impose some penalty for the loss of a paper check, such as the fee for reissuing the check. The carrot or the stick might cause employees to elect direct deposit.

    As to the use of debit payroll cards, the federal Consumer Financial Protection Bureau issued a bulletin on September 12, 2013, stating that, under federal law, employers cannot require employees to accept wages on a payroll card. In addition, employees who elect to be paid by payroll card are entitled to certain protections under federal law:

    • Employees must receive initial disclosures, which must be clear and in writing, of any fees they may incur resulting from the electronic transfer of funds to or from the card.
    • The card issuer must either provide regular account statements or make the account balance available by phone. In addition, the account history, including fee information, must be available online or, if requested, in writing.
    • The liability of the employee for unauthorized use of their payroll card is limited, as long as the employee timely reports the unauthorized use.
    • If the employee timely reports a payroll card account error, the issuing institution must respond.

    In addition, a number of states have laws either restricting or governing the use of debit payroll cards, by which employees can receive wages on such cards. Most states do not permit employers to require the use of payroll cards - like direct deposit, the employee typically must consent to their use.

    In a time when more and more employers are seeking to go paperless and cut down on administrative paperwork associated with physical checks, employers must be careful to comply with these legal restrictions on the usual alternatives of direct deposit and payroll cards.