Best Practices for 100% Electronic Paychecks: Successful and Compliant Electronic Payroll Distribution

by Abbe Conrad 0

Most employers today recognize the value of electronic payroll distribution systems (EDPS). Paper paychecks are costly to process and distribute, and a small percentage of paychecks invariably have problems that require administrative resources to sort out. The primary employer drivers for implementing electronic payroll distribution systems are to increase electronic payment participation, reduce costs, and to provide additional payment options for non-banked, under-banked, or de-banked individuals.

While integrating an electronic payroll distribution service can significantly reduce operational costs, it is important to understand that the wage-payment landscape is very complex and highly regulated. Following best practices can ensure a successful launch and a compliant program.

The most important rule to follow when implementing EPDS is that employees must be given a choice and free access to all of their wages. To understand why, it’s important to have an understanding of the differing state requirements based on their wage-payment laws. At a high level, here’s a summary of how state requirements differ:

• All states permit employees to be paid by paper check;
• Most states permit employees to be paid by Direct Deposit to their own bank account, if the employee consents;
• Some states permit employees to be paid by paycard, if the employee consents; and
• A few states allow a “default” to a paycard, if the employee has been given the opportunity (and time) to elect Direct Deposit.

Employers have a choice to implement a varying solution by state, but by following best practices, they can implement a single system that enables 100 percent electronic pay company wide. Once the EPDS is implemented, paying employees becomes as simple as Direct Deposit.

EPDS that include convenience checks enable employers to reach 100 percent electronic payroll. “Paycard” programs are different then EPDS. EDPS systems involve the use of two innovations in payroll distribution:

• The payroll debit card, or “paycard,” which works just like a bank debit card; and
• The “convenience check,” which is a paper paycheck that is self-issued by the employee, not the employer.

The employee can make purchases using the paycard just like a debit card, or withdraw cash from the account balance at ATMs. If an employee still prefers a paper paycheck, they can authorize a convenience check that can be cashed or deposited. Properly designed by the EPDS provider, the employee always has access to their funds by paper check, thus enabling compliance with wage-payment laws across the 50 states.

While many employers are embracing EPDS, a poor implementation strategy can threaten the successful migration to electronic payroll. With good planning and adherence to best practices, they can ensure success in a move to electronic payroll and increase employee satisfaction with their pay options.

Keys to successfully rolling out an EDPS solution include the following:

• Executive buy-in and an executive level champion of the change to an EPDS;
• A definition of success for the program;
• A clear statement of the reasons for making the change;
• A communications strategy that clearly states the program and its benefits to both management and employees;
• An employee welcome kit that simplifies enrollment in the program; and
• A corporate commitment to adhering to the plan.

The most common mistake employers make is to require an EPDS for certain types of pay, such as termination wages, off-cycle pay, and bonuses. These examples are wages just as much as regular pay, so they must be treated as such following the same best practices.

Launching and operating an EDPS program involves two parallel sets of activities; managing a strategy to migrate existing employees to electronic payroll, and making the EPDS a standard part of the new-hire process. A successful migration will move all employees to EPDS, but with a minimal amount of stress and confusion.

A critical best practice is to properly present and characterize the wage-payment options to employees, and to obtain their written or electronic consent. Premier EPDS providers offer materials and forms for employers to successfully implement a compliant program. They’ve “done the thinking” to make the employer successful.

Employees will need to understand whatever transaction fees exist in the EPDS program. This information should be in the communication materials provided by the EDPS provider. It is good practice to have a payroll representative include a fee discussion in the welcome process. It’s useful for employees to understand that they can continue to use the card and convenience checks as long as there are funds on the account, even if they leave the company.

Overall, implementing EPDS benefits both the employer and the employees. By providing a choice, an implementation that adheres to best practices, and clear communication of change, employers have a head start in making positive impact to their operational expenses and employee satisfaction.

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