Most employees and employers know what a great tool direct deposit is, but are you using direct deposit to its greatest advantage, and are you protecting yourself from any issues that may arise from paying employees via direct deposit?

The National Automated Clearing House Association (NACHA) estimates that an employer can save between $2.87 and $3.15 per payment by using direct deposit instead of live checks. For an employer with 25 employees and a bi-weekly payroll, this is around $2000 in savings annually.

The biggest reason that employers choose to offer direct deposit to their employees is that it cuts down considerably on the hassles of issuing paychecks to employees.  The funds are guaranteed to be in employees’ accounts on payday. Direct deposit virtually eliminates issues with unclaimed checks and escheatment, and even though a direct deposit paystub may be lost, the funds themselves are safely in the employee’s bank account.

So what do I need to know about direct deposit?

1. It is important that you require your employees to complete a direct deposit authorization form.  The form authorizes you to deposit funds into the employees’ accounts, but more importantly authorizes you to reverse those funds out in the event of an overpayment or error. This is vital, especially in light of recent banking law changes.  You can get a copy of this form by clicking here.
2. Make certain that you get a copy of a voided check from your employees when setting up direct deposits.  Do not accept deposit slips unless it is from a savings account.  If the deposit slip’s routing number begins with a 5, it is an internal routing number and should not be used as direct deposit can’t be processed with that routing number.  Ask your employee to bring in a voided check (or a copy of a blank check) or a specification sheet from their bank to confirm the correct numbers.
3. Let the account information prenote on all new direct deposit setups whenever possible.

What if my employee doesn’t have a bank account yet I want to pay all my employees electronically?

• Paycards are a great way to electronically pay an unbanked employee.  Our Paycard solution is no cost to the employer, and your employee’s can use the cards fee-free if they follow simple usage rules.  Click here for more details on the PCS Paycard Program.

Unfortunately an employee was incorrectly paid. What are the options to correct the payment?

Communication is key.  Let your employee know what is going to happen to their bank account.  Ensure they understand that they will see at least two transactions posting to their bank account; one that deposits the funds into the account and another that reverses the funds out of their account. If it is an underpayment situation, let them know how they will receive the additional funds.

• If you have underpaid an employee, the best thing to do is let the original direct deposit process and create a manual check for the difference.
• If an employee has been overpaid, call your Client Account Manager to initiate the direct deposit reversal process.   Click here to download the Direct Deposit Reversal Request form or contact your CAM for  help on deciding the best way to get the funds returned to your company, as well as get a corrected check issued to the employee.
• There is a very small window of time for the employer to initiate a direct deposit reversal (typically 5 business days from paydate), so make the request with your CAM as soon as possible.
• It is important to note that if an employee does not authorize the reversal, they may dispute the transaction, and they have up to 60 days to do that. If that does happen, you will have to get the funds back directly from the employee.

What do you do if employee comes to you and says that their bank account is closed or has been fraudulently accessed?

• Ensure the employee has contacted their bank to not only inform them of the potential fraud, but that there is a direct deposit pending.
• The best thing for the employer to do is wait.  The bank may return the direct deposit funds if the account was closed prior to the posting date of the direct deposit.  This typically takes two (2) business days from paydate.
• If a fraud report has been made by the account holder(employee) the bank will return the funds to the company. The bank may also put the direct deposit in a new account if one has been opened by the employee. This is rare, but possible especially if it is at a credit union.

What if there are not enough funds to cover a direct deposit reversal?

• Unfortunately, the request will be rejected by the employee’s bank if there are not sufficient funds to cover the entire amount.  They will not process a partial amount. You will have to get the funds directly from the employee.

Your CAM is always available to answer any questions that you have regarding direct deposit, paycards or banking questions in general.

Submitted By:

The PCS Client Services Team

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.