Electronic Fund Transfer of Wages

Department of Labor Interpretation

EEOC Considerations

FDIC Statute and Rule

Texas Law

Practical Tips (including Debit Cards)

Direct Deposit of Expense Reimbursements

The issue of whether an employer can require employees to accept pay via direct deposit of wages into personal bank accounts is a bit more complicated than it looks. The technical answer may boil down to "yes" or "no", but in practical reality, most employers can convince most, if not all, employees to sign up for direct deposit.

Department of Labor Interpretation

One potential complicating factor is the U.S. Department of Labor's position regarding direct deposit found in Section 30c00 of its Field Operations Handbook:

Section 30c Payment of Wages
30c00 Method of Payment

The payment of wages through direct deposit into an employee's bank account is an acceptable method of payment, provided employees have the option of receiving payment by cash or check directly from the employer. As an alternative, the employer may make arrangements for employees to cash a check drawn against the employer's payroll deposit account, if it is at a place convenient to their employment and without charge to them. (Field Operations Handbook, 12/9/88)

DOL is obviously concerned that forcing employees to accept direct deposit violates minimum wage laws if there is a charge to the employees that effectively takes their wages below minimum wage. Presumably, DOL would not have that concern if the direct deposit bank account charge did not have that effect.

EEOC Considerations

There is also a risk that under some circumstances, requiring employees to accept direct deposit of wages may raise an issue of disparate impact on minorities. The EEOC may feel that if statistical evidence shows that more minorities than non-minorities have trouble getting and keeping a bank account, then a direct deposit requirement by the employer would have a disproportionate impact on minorities. The solution would be to work with the employee to find a bank that would open a free account for wage deposits, or else the employer can cover any bank charges for the employee.

CFPB Statute and Rule

Federal law clearly states that an employer may not require an employee to accept direct deposit of wages at a particular financial institution. Title 15 of the U.S. Code, Section 1693k, provides the following:

§ 1693k. Compulsory use of electronic fund transfers

No person may--

  1. condition the extension of credit to a consumer on such consumer's repayment by means of preauthorized electronic fund transfers; or
  2. require a consumer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of employment or receipt of a government benefit.


The CFPB regulation interpreting that provision quotes the statute almost exactly:

12 C.F.R. § 1005.10 Preauthorized transfers. (e) Compulsory use--(2) Employment or government benefit. No financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment or receipt of a government benefit.


Useful clarification appears in the CFPB staff interpretations for 12 C.F.R. § 1005.10:


Paragraph 10(e)(2)--Employment or Government Benefit

  1. Payroll. An employer (including a financial institution) may not require its employees to receive their salary by direct deposit to any particular institution. An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer) or receiving their salary by another means, such as by check or cash.


Thus, according to CFPB staff, there would be no problem under the Electronic Fund Transfer Act with requiring employees to accept direct deposit of wages by EFT if they are allowed to choose the bank at which the depository account will exist.

Texas Law on Direct Deposit of Wages

In 2003, Texas law was amended by HB 3308 to add a direct deposit provision to Section 61.017 of the Texas Payday Law. New subsection (c) provides that an employer may elect to pay wages via direct deposit to employees who maintain suitable bank accounts, as long as the employer gives at least 60 days' advance written notice of the adoption of the direct deposit wage payment system and obtains from the employees whatever information is required by their banks to commence such deposits. Direct deposit wage payment was already possible under the Texas Payday Law - the change was basically to make that option clear. However, the problem with the amendment is twofold:

  1. The state law does not overcome whatever objections the DOL and the EEOC may have toward such a system under the federal laws they enforce.

  2. The new provision allows direct deposit of wages for employees who already have bank accounts. It does not expressly state that an employer may require an employee who does not maintain a bank account to establish one. This ambiguity will probably leave many employers in doubt as to their position regarding direct deposit of wages.

Practical Tips for Direct Deposit (including Debit Cards)    Top of Page

As anyone who has managed employees can confirm, there are some employees who simply will not opt-in to such a system. Some employees with bank accounts do not trust direct deposit and want to see a physical paycheck that they can personally deposit. Some employees do not have bank accounts because they cannot afford bank fees, or because they do not trust banks, or because they are concerned that a bank account makes it too easy for the government to track them (people of the "leave me alone" persuasion, or those avoiding child support or alimony judgments, are the two main categories there). There are some ways to overcome the objections for some people, such as by establishing no-cost bank accounts for employees who request such an accommodation and can demonstrate financial need, or by making clear that in the case of mistakes by banks, the employer will immediately pay wages by an alternative method, such as a check or cash. Some employers even arrange with employees, who object to direct deposit, to pay wages with debit cards, which can be readily used just like cash. Wage payment by debit card would have to be approved by the employee in writing, however, under Texas Payday Law Section 61.017(b)(5). ("An employer may pay wages by ... delivering them to the employee by any reasonable means authorized by the employee in writing."). Watch out, though, for debit cards that result in a fee to the employee each time they are used; such fees could easily be seen as de facto deductions from wages that might cause problems under the Texas Payday Law ("might" because there are no precedent decisions or court rulings on this point) and would cause problems under federal minimum wage laws for those who are paid at or near minimum wage ("would" because of clear guidance from DOL on out-of-pocket expenses that effectively reduce the pay below minimum wage). Keep in mind that a federal agency, the Consumer Financial Protection Bureau, has issued an opinion that an employer may not require acceptance of wages via a payroll card (since that would be the same as mandating the financial institution at which the wage deposit account will be maintained - see the FDIC rule quoted above). The CFPB's official guidance on payroll cards is online at http://files.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf. Finally, anticipate in your policies and/or wage agreements how potential problems such as identity theft and loss or replacement of debit cards should be handled.

Direct Deposit of Expense Reimbursements    Top of Page

The same basic considerations would apply to direct deposit of expense reimbursements, although not necessarily to the same extent. Keep in mind that expense reimbursements are not considered "wages", and thus the state law cited above would not apply. However, as noted in the topic "Deductions for Other Costs to the Employer", certain out-of-pocket expenses that effectively reduce an employee's pay below minimum wage can violate the minimum wage provisions of the FLSA, so expense reimbursements necessary to prevent such a violation would arguably be considered wages. Thus, the allowability of requiring direct deposit of expense reimbursements would fall into two categories:

  1. If minimum wage is not an issue, none of the above considerations apply, and the employer can handle the reimbursements in any manner it deems appropriate.
  2. If minimum wage is an issue, the above considerations apply, and the employer would need to take care that whatever solution it adopts does not result in additional out-of-pocket costs to the employee.

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