How Implementing Direct Deposit Can Impact Your Small Business

by Chris Rush 0

A prevailing trend within the payments industry is the adoption of paperless processes to cut down on waste and cost. This can include varying approaches for different small businesses, but many have focused on direct deposit as a cost-effective way to pay employees.

Not only can the use of direct deposit reduce paper and overall cost, it also shrinks the amount of time needed to provide payment by removing the check-printing process and the additional step that an employee may take to visit a bank. This is especially convenient when distributing bonus pay or when issuing an employee’s final pay. Furthermore, direct deposit helps ensure employees get paid promptly, while delivery of physical checks might get delayed by severe weather.

But while direct deposit offers simplicity and convenience, it can become an unexpected burden for companies that are not properly prepared for additional layers of compliance standards. This includes higher expectations through state and federal laws for deductions, record-keeping and other pay-related issues. As with the implementation of any new process, it’s imperative that businesses are aware of how direct deposit might alter their payroll requirements.

First, small businesses should know that the general direct deposit process is regulated at a state level, meaning that employers operating in multiple states must be aware of any differences in state regulations and how they might apply to their business. For example, employers within some states have the option of requiring employees to receive their pay through direct deposit as long as they have access to the financial institution of their choice, while other states may prohibit employers from making direct deposit mandatory. It is best practice for employers to obtain and retain written authorization from their employees permitting use of direct deposit and designating their selected financial institution.

Second, businesses need to take into consideration how the Fair Labor Standards Act (FLSA) and state record retention requirements will impact their payment processes. The FLSA requires employers to keep payment records for at least three years and many states also impose record retention requirements. For businesses that may have recently switched to exclusively providing direct deposit, they will need to ensure they are properly recording when employees are paid, which will likely involve switching from physical to digital recordkeeping.

The FLSA does not require employers to provide wage statements to their employees for each pay period, however many states have such requirements. States may also specify the earnings information to be included on each pay statement. This gives employees a crystal clear understanding of their hours worked, hourly pay and year-to-date earnings. Fortunately, there are still payroll options that offer electronic wage statements in tandem with direct deposit. Still, these state-by-state mandates can be another hurdle for small employers operating in multiple states.

As long as small businesses remain on top of the varying federal and state regulations, the adoption of direct deposit and other paperless options can help to reduce costs and simplify business processes. It remains the responsibility of individual employers, however, to consider the best interests of their employees and how implementing these new processes might affect them as well as the company’s overall compliance.