Q. We would like to require employees to accept pay via direct deposit. Is this permitted?
A. Direct deposit is an increasingly common method of paying employees, with numerous advantages for employees (fewer trips to the bank, no worry about losing a check) and employers (reduced cost and administrative hassle).
The Fair Labor Standards Act does not directly answer this question. However, in its interpretive regulations, the U.S. Department of Labor states that the FLSA requires payment “in cash or negotiable instrument payable at par,” except under limited circumstances in which employers are permitted to record a credit for board, lodging, and other facilities. 29 CFR § 531.27. That of course begs the question of whether direct deposit into a bank account qualifies as a “cash equivalent.” The regulations do not address that question, but in Section 30c00(b) of its Field Operations Handbook, the DOL says the following:
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. [Emphasis added.]
So, at least according to the U.S. Department of Labor, employers can pay employees via direct deposit, but have to allow employees the option of receiving payment by cash or check. (Note – we strongly recommend against paying employees in cash.)
Most states also have laws that govern when and how employers must pay employees. While a handful of states permit employers to mandate direct deposit (usually with some restrictions), most, like Illinois, allow direct deposit only with the agreement of the employee. The Society of Human Resources Management has a useful compilation of state laws on wage payments and direct deposit available here.