Direct Deposit Payments

Direct deposit works most simply if a company uses a payroll supplier, since this third party will have an automated direct deposit linkage. If payroll is processed in-house, then a company must send an electronic file containing information about where money is to be transferred, as well as the accounts into which they will be deposited, to a financial institution that is equipped to process direct deposit transactions. This file is processed through the Automated Clearing House (ACH) network, which transfers the funds. The employer then issues a payment advice to employees, either on paper or electronically, that details their gross pay, taxes and other deductions, and net pay.

Employers can require employees to accept direct deposit, though this requirement is frequently overridden by state laws that require employee concurrence. Consequently, it is best to obtain written permission from employees prior to setting them up for direct deposit payments. This permission should include the routing number of the bank to which payments are to be sent, the account number within that bank, and the amount of funds to be deposited in each account. Typically, funds may be deposited in multiple accounts, such as $100 in a savings account and the remainder in a checking account. When asking for written permission from employees, it is best to also obtain a voided check for the account to which the funds are to be sent, in order to verify the routing and account numbers. Using a deposit slip to verify this information is not recommended, since the identification numbers on the slip may not match those of the bank.

When an employee signs up for direct deposit, he or she should be informed that the next paycheck will still be issued as a check, since the direct deposit transaction must first be verified with a prenotification transaction to verify that a regular paycheck will arrive properly in the employee's account. A prenotification transaction, in which a zero-dollar payment is sent to the employee, is quite useful for verifying that a standard direct deposit transaction will process properly. Consequently, though it is not required, a company should always insist on a prenotification transaction when first setting up an employee on direct deposit.

If a company has locations in multiple states and processes its payroll from a single central location, then the checks sent to outlying locations will take longer to clear (since they are drawn on an out-of-state bank). This issue should be brought to the attention of employees in the outlying locations, which may convince them to switch over to direct deposit payments, which require no timing delay in making payments.