Electronic payment law can lower payroll costs

March 13, 2011
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When it comes to payday, direct deposit has been growing in popularity for both busy employees and cost-conscience employers looking to save money on payroll.

Yet, until quite recently, Michigan law allowed employers to use electronic payment only when they had the consent of the employee.

This changed in late December 2010, when the Michigan legislature passed a law allowing organizations to require the use of an electronic payment system. Moving payroll to an electronic system helps organizations streamline processes and therefore minimize costs.

Because an electronic payment system can be an important money saver, employers should consider making the switch, but must be wary of the statutory requirements. The law comes with several conditions of which employees and employers should be aware.

Choices for employees

First, the law requires employers to offer their employees a choice between two forms of electronic payment. Specifically, in order to provide alternative methods for people who don't have bank accounts or who prefer to pay with cash, the law requires employers to offer a payroll debit card option in addition to direct deposit.

A payroll debit card looks and functions similar to a traditional debit card, but is linked to an account set up by the employer specifically for the participating employee. Once the funds are deposited, the employer no longer has control over the account. In this way, the card functions similar to a paper check, but instead of "cashing" a check, the employee may instead withdraw cash at an ATM.

The law requires that a payroll debit card offer at least one free ATM withdrawal or transfer per pay period, up to the full balance available on the card. This eliminates the concern that an employee could be financially penalized for accessing his or her wages.

Written notification and time to choose

Secondly, the law requires an employer to provide employees written notification of their options, and 30 days to choose whether they wish to receive wages by direct deposit or by payroll debit card.

If there are any charges or terms of use that come with the debit payroll, such as frequent use ATM fees, the employer must supply full disclosure of the charges and terms of use of a payroll debit card.

If an employee doesn't return the form within 30 days, he or she will automatically receive wages by payroll debit card. The only exception to this is if the employee is already paid by direct deposit, in which case direct deposit must be continued by the employer.  

Other provisions in the law require that a mandatory payroll debit card must:

  • Be issued by a federally insured financial institution.

  • Provide the employee with immediate access to withdraw or transfer wages through a network of ATMs.

  • Allow the employee to make an unlimited number of balance inquiries, without charge.

The terms of the card cannot be changed without 21 days written notice to the employee, and the card cannot be linked to any form of credit, including cash advances or loans against future pay.

Electronic payment methods may save businesses and organizations some costs. However, it should be noted that even though payroll is electronic, the law still requires employers to provide employees information at the time wages are paid concerning their gross wages, hours worked and deductions from pay. This aspect of the law has not changed. 

The new law opens a door for Michigan employers to explore, although companies operating in more than one state must consider other applicable state laws, as well. 

Overall, Michigan's new law provides options that are more in keeping than prior rules with how many people transact business and manage money in today's world.

Stephanie Setterington is a labor group partner in the law firm of Varnum LLP.

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