The check’s in the mail—or the money’s already in the bank

Could paper checks be making a comeback? If you ask any rep whose bank allows remote deposit via a smartphone, the answer would be a resounding “Yes.” And that’s bad news for you, since paper checks are expensive.

What about paycards? Can you steer employees to paycards instead of checks or direct deposit? Yes, but you can’t require them.

Paycard class action settles. A class-action lawsuit filed in Pennsylvania state court, which has been kicking around since 2013, has finally settled, to the tune of $3 million. What happened: The plaintiffs, employees at a fast food establishment, alleged the store manager told them they had to activate their paycards so they could be paid. Employees could withdraw their entire net pay fee-free, but due to poor communication, they didn’t understand that option. As a result, they incurred fees for ATM withdrawals, balance inquiries, etc. (Sciliano v. Mueller, No. 2013-7010, Pa. Ct. Cm. Pl., 2017)

The employer in this case made two serious mistakes: It mandated that employees receive their pay on paycards, which federal Regulation E doesn’t allow unless you give employees a choice between paycards and another delivery method, such as direct deposit. And it failed to effectively communicate to employees that they could withdraw their entire net pay fee-free.

Regardless of Reg. E, most states don’t allow you to force employees into a paycard program. And all states require that employees be able to cash out their entire net pay fee-free. To keep your paycard program on track, consider the following:

  • Review payment options with new hires in person. Have them sign acknowledgments stating all payment options were explored and they have voluntarily consented to paycards before the first payday.
  • Make opting out of a paycard program as easy as possible and reassure employees they won’t be retaliated against for doing so.
  • Avoid card issuers that provide cash incentives to employers or overdraft protection to employees.
  • Offer paycards that are widely accepted at surcharge-free ATMs and cards that come with courtesy checks, no-frills bank accounts and online bill paying. Don’t agree to load pay onto employees’ personal debit cards. Reason: General purpose debit cards are subject to the full array of fees, which violate state paycard laws.
  • Provide employees with appropriate disclosures and ensure they understand them, especially when fees can be charged. Compile employees’ questions into FAQs, which everyone can access.

Although paycards have traditionally been pitched to employees who can’t get bank accounts, millennials and younger cohorts of employees can get bank accounts if they choose. They just choose not to. Prepare your pitch: Explain how to use paycards effectively. This includes paying bills, accessing financial management tools and alerts and other mobile features.

Defending direct deposit. Anyone can take a snapshot of a check with a phone, so you have to have a smart strategy to combat banks’ tempting employees away from direct deposit with remote check deposit. Main risk: identity theft, which can stem from lax security in a bank’s ability to authenticate its customers, a lack of encryption in the remote deposit system and security lapses at the vendor who installs and maintains a bank’s remote deposit system.

For new hires, one tried-and-true tactic is to just ignore their smartphone apps and include direct deposit enrollment forms as part of the routine paperwork—W-4s, I-9s, etc.—they must complete.

CHECK, PLEASE: Regardless of your best efforts, some employees will never buy into direct deposit. NACHA, the electronic payments organization that represents banks, has a website full of ideas you can use to coax resistant employees. For more information, point your browser to https://tinyurl.com/nachaaide.

You can entice employees into direct deposit with talk of identity theft, but your efforts will fall by the wayside if repeated mistakes hinder their ability to reach their pay. You can avoid the most common problem—employees’ pay not being deposited—by having them provide you with voided checks when they enroll (deposit slips won’t do), double checking that the surnames on their bank accounts match the names in your payroll and personnel records and reminding employees to notify you immediately if they change direct-deposit-linked banks or accounts.

Fixing other errors is more complicated, however, because you’ll have to work with your bank to reverse the electronic transaction. Heed these reversal rules:

  • Reversals must be originated within five banking days of the settlement of the original (and erroneous) settlement and within 24 hours of when the error was discovered. Employees must generally be notified of a reversal.
  • If employees have already withdrawn their funds, their banks don’t have to comply with your reversal requests.
  • If the mistake is an overpayment or underpayment of wages, don’t ask for a partial reversal. You must reverse the whole transaction and start again.

THE FLY IN THE OINTMENT: States usually require that employees voluntarily participate in electronic pay programs. The chart below summarizes those state rules. “Mandatory” means a state allows you to make e-payment a condition of employment, if you choose. Due to space considerations, states that don’t have laws haven’t been included.

 

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2018 all-states chart on direct deposit/paycards