Employers are continually searching for methods to reduce costs and streamline administrative operations, and the scrutiny of the expensive and time-consuming payroll process has been one of the primary targets. More and more employers are looking at direct deposit of payroll as the preferred method of paying employees. This article examines the concept of direct deposit, including the benefits, concerns and legal considerations.
Direct Deposit is the electronic transfer of a payment from a company or organization into an individual’s checking or savings account. In banking terms, direct deposit is an Automated Clearing House (ACH) application that allows consumers to have their paycheck or other deposits electronically deposited or credited to a savings, checking or other type of account at any financial institution. The employer supplies its financial institution with payment information and that financial institution then electronically sends transactions to the ACH operator for distribution to the employee’s financial institution. The financial institution requires written authorization from the employee.
Studies indicate that more than 70 percent of all workers in this country receive their pay through direct deposit. Eighty percent of large companies (companies that employ more than 500 employees) offer direct deposit of employee wages. Many employers and employees consider direct deposit an important employee benefit. Educational institutions, state and federal governmental agencies and retirement administrators often require direct deposit. Over 85% of people receiving social security benefits use direct deposit and over 500,000 companies in this country offer direct deposit to their employees. Direct deposit is even more common outside of the United States. Almost all European and Japanese workers receive their pay by direct deposit.
Payroll deposit is one of the most common uses of direct deposit. However it may be used for many other deposit applications including bonus payments, commissions, expenses reimbursements, benefits, dividends, child support, social security, retirement and pension payments, tax refunds and many others.
Payroll direct deposit can significantly reduce production, administration and distribution costs of paying an employee. The average cost to issue a paper paycheck is approximately $1.20 per employee, not including distribution or postage expenses. The Financial Management Service has estimated that the federal government saves more than $100 million each year by using direct deposit. Direct deposit eliminates concerns about lost or stolen paychecks and the expense of stop payment charges. Employers often experience an increase in employee productivity on paydays since employees no longer leave work to deposit a paycheck. A number of internal operating efficiencies are generally reported by employers who implement direct deposit programs. The potential for fraud is reduced because there are fewer opportunities for counterfeit checks, stolen checks, signature plates, altered amounts and forged signatures and there is no need for facsimile signature security. Companies of any size can offer direct deposit. A payroll card program can be set up for employees who do not have bank accounts.
Employees who receive their pay through direct deposit have immediate access to funds on payday. There is no waiting period for checks to clear and no hold placed on an out of state check. Deposits are made automatically and timely. The employee is provided with an earnings statement or paper record of the deposit, including all of the information historically found on a paycheck stub such as sick pay and vacation accruals. Employees do not need to leave the office on payday to stand in line at the bank, and they have the security of knowing that their pay has been deposited when they are out of the office or on vacation. Employees also benefit by the safety and security of the transaction, and the potential for increased interest accrual. In addition, many employers offer split deposits which employees can use to automatically increase savings by directing a portion of their pay directly into a savings account. Many financial institutions offer free checking and other account benefits to customers who use direct deposit.
Problems with direct deposit are rare because the transaction is electronic. Some statistics indicate that paper checks are 20 times more likely to cause problems than direct deposit. Generally problems with direct deposit are more easily corrected than problems with paychecks. The same procedures used to correct a problem with a paycheck can be used to correct to correct an error by direct deposit. Communicating any account changes or closures to the employer ahead of time will reduce the possibility of a problem with direct deposit.
The Federal law prohibits an employer from mandating direct deposit to a “particular financial institution”. As long as the employee may choose his or her own bank, federal law is satisfied. However, state laws on the subject of direct deposit vary widely. Some states allow mandatory direct deposit and others require an employee’s voluntary consent. Individual state laws and/or the state department of labor should be consulted before implementing a mandatory direct deposit program.
Since mandatory direct deposit is not always an option, many employers have utilized different methods to promote direct deposit to employees. Educating employees about the benefits of direct deposit and addressing their concerns and misconceptions, often increases employee participation significantly. First, encouraging all new employees to sign up for direct deposit at the time of hire is helpful. In some states employers may even make direct deposit a condition of employment for all new employees. Periodic paycheck inserts are an effective method of reminding employees about direct deposit. Reminders about direct deposit can be printed on paychecks as well. Employers may offer incentives to employees who sign up for direct deposit or to human resource staff who assist in the process. Also, financial institutions may offer employee seminars about the security and benefits of direct deposit or supply promotional videos.
Direct deposit is a secure and efficient method of managing employee payroll and is expected to continue to increase in popularity for employers and employees. The benefits to all parties have far outweighed the concerns initially raised about the process.
© 2006 All rights reserved.
The author, Ann B. Plunkett, is an employment attorney and president and founder of WorkPlace Partners, Inc., a full-service human resource consulting firm. Ann is a frequent guest speaker on a variety of employment law and human resource topics. She has researched state direct deposit laws which are available at
www.directdepositlaws.com
U.S. Supreme Court Rules in Retaliation Case - July 6, 2006
The anti-retaliation provisions of Title VII have always prohibited employers from retaliating against an employee for opposing a discriminatory practice in the workplace. However, in the recent United States Supreme Court case, Burlington Northern and Santa Fe Railway Co. v. White, the definition of retaliation was broadened to potentially include acts that occur outside the workplace and are unrelated to the employment. Although an act must still be "materially adverse" to be retaliatory and thus prohibited, the Supreme Court also adopted an new, less stringent standard of adversity. An act is considered to be materially adverse whenever it "could well dissuade a reasonable worker from making or supporting a charge of discrimination." Based on this change, employers could be liable for retaliation even without reducing an employee's pay, benefits or privileges of employment.
The Burlington Northern case is based on a sexual harassment complaint made by a former employee, Sheila White. White was the only female employee in the Tennessee maintenance yard. She complained of sexual harassment, and the company suspended the offending harasser. Burlington also reassigned White from forklift operator to track laborer, a position that did not require new or different job duties. They company claimed this reassignment was in response to complaints from other employees who thought the sought-after forklift duties should be given to a more senior employee.
After her reassignment, White filed a charge of sex discrimination with the Equal Employment Opportunity Commission. A few days later, White and her supervisor had a disagreement and White was accused of insubordination and was suspended without pay. Thirty-seven days later, Burlington's internal grievance board reinstated White and awarded her backpay. White filed a retaliation claim under Title VII alleging her reassignment from forklift operator to track laborer and her suspension were both retaliatory.
White won a jury verdict of $43,500. The company appealed and the 6th Circuit ultimately found in White's favor on the retaliation claims. The Supreme Court affirmed the verdict in White's favor in adopting the new standard to decide claims of retaliation.
This new standard represents a change in the 8th Circuit, which includes Missouri. Previously, a plaintiff claiming retaliation under Title VII had to demonstrate that the retaliatory conduct involved an "ultimate employment decision." Only actions such as hire, granting leave, discharge and promotion or demotion could support a claim of retaliation. The Supreme Court's decision in Burlington reduces the standard for the types of conduct necessary for a claim for retaliation, although the court did note that mere reassignment to less desirable job duties is not automatically retaliation.
As always, employers must be careful when imposing discipline on an employee who have engaged in protected activity, even if company policies allow for such discipline.
EEOC Overhauls EEO-1 Report - January 31, 2006
All employers with 100 or more employees need to be aware that the U.S. Equal Employment Opportunity Commission (EEOC) has implemented the first major changes to the the EEO-1 Report in four decades.
The EEO-1 Report provides the federal government with workforce profiles by ethnicity, race, and gender, divided into job categories. The new format will be required for the first time for the 2007 survey, which is due by September 30, 2007. The agency expects employers to use the current format for their 2006 EEO-1 submissions.
The new EEO-1 Report's race and ethnic categories include:
- Adding a new category titled "Two or more races, not Hispanic or Latino";
- Deleting the "Asian and Pacific Islanders" category;
- Adding a new category titled "Asians, not Hispanic or Latino";
- Adding a new category titled "Native Hawaiian or Other Pacific Islander, not Hispanic or Latino";
- Extending the EEO-1 data collection by race and ethnicity to the State of Hawaii ; and
- Strongly endorsing employee self-identification of race and ethnicity, as opposed to visual identification by employers.
The new EEO-1 Report's job categories include:
- Dividing "Officials and Managers" into two levels based on responsibility and influence within the organization: "Executive/Senior Level Officials and Managers" and "First/Mid-Level Official and Managers"; and
- Moving non-managerial business and financial occupations from the "Officials and Managers" category to the "Professionals" category.
EEO-1 Reports must be filed annually by employers with 100 or more employees, or employers with federal government contracts of $50,000 or more and 50 or more employees.
The new report format, instructions, and explanation can be found on the EEOC's website at www.eeoc.gov/eeo1/index.html.
Illinois Human Rights Act Amended to Include Sexual Orientation
