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Direct deposit, the preferred method of payment

Direct deposit, the preferred method of payment

By Yosie Saint-Cyr, LL.B., Managing Editor, HRinfodesk.com---Canadian Payroll and Employment Law News, November 2009

Every employer is responsible for the payment of wages to persons she or he employs. However, employers are continually searching for methods to reduce costs and streamline administrative operations, and the expensive and time-consuming payroll process has been one of the primary targets. The latest HRinfodesk Poll wanted to know what method(s) of payment does your organization use to pay employees? The result indicated that the majority of poll respondents (221/66.37%) are using the direct deposit method to pay wages. This indicates that more and more employers are looking at direct deposit of payroll as the preferred method of paying employees. However, paying employees by the traditional paper “paycheque” is still common. For more details on the results, see the table below.

Each province and territory in Canada requires an employer to pay wages to employees at a certain frequency and within a certain amount of time after the end of the pay period. In addition, the law specifies how employees should be paid: by cash, cheque or direct deposit. This commentary examines the concept of paying wages by direct deposit, including the benefits, concerns and legal considerations.

What is direct deposit?

A paycheque is traditionally a paper document an employer issues to pay an employee for services rendered. In recent times, employers have increasingly replaced the physical paycheque with electronic direct deposits to bank accounts.

Direct deposit has been available in Canada since November 1990. In banking terms, direct deposit is an application that allows consumers to have their pay or other deposits electronically deposited or credited to an account at a financial institution. The employer supplies its financial institution with payment information and that financial institution then electronically sends transactions to an operator for distribution to the employee's financial institution. The financial institution requires written authorization from the employee.

Payroll deposit is one of the most common uses of direct deposit.

Why use direct deposit?

Payroll direct deposit can significantly reduce the production, administration and distribution costs of paying an employee.

Direct deposit eliminates concerns about lost or stolen paycheques and the expense of stop-payment charges. Direct deposits reduce the potential for fraud because there are fewer opportunities for counterfeit cheques, stolen cheques, signature plates, altered amounts and forged signatures, and there is no need for facsimile signature security. Moreover, with direct deposit, employers often experience an increase in employee productivity on paydays since employees no longer leave work to deposit a paycheque. Employers who implement direct deposit programs generally report a number of internal operating efficiencies.

The best part is that companies of any size can offer direct deposit.

Employees who receive their pay through direct deposit have immediate access to funds on payday. There is no waiting period for cheques to clear and no hold placed on an out-of-province cheque. Deposits are made automatically and timely. The employer provides the employee with an earnings statement or paper record of the deposit, including all of the information historically found on a paycheque stub, such as deductions at source and vacation pay information. Employees do not need to leave the office on payday to stand in line at the bank, and they have the security of knowing that their pay has been deposited when they are out of the office or on vacation. Employees also benefit by the safety and security of the transaction, and the potential for increased interest accrual.

In addition, many employers offer split deposits which employees can use to automatically increase savings by directing a portion of their pay directly into a savings account. Many financial institutions offer free chequing and other account benefits to customers who use direct deposit.

Generally problems with direct deposit are more easily corrected than problems with paycheques. The same procedures used to correct a problem with a paycheque can be used to correct an error by direct deposit. Communicating any account changes or closures to the employer ahead of time will reduce the possibility of a problem with direct deposit.

Legal considerations and concerns

Paying employees by directly depositing their wages into their bank accounts is a common business practice and is subject to various requirements set out in the employment standards legislation of each jurisdiction.

Provinces and territories require an employer to provide employees with a statement of wages. This statement is the detailed record of earnings, deductions, benefits and vacation pay/leave balances received by the employee for the pay period. Some provinces and territories allow employers to provide electronic copies of the statement.

In Federally regulated workplaces, employers must pay to any employee any wages to which the employee is entitled on the regular payday of the employee as established by the practice of the employer; and pay any wages or other amounts to which the employee is entitled under the Canada Labour Code within 30 days from the time when the entitlement to the wages or other amounts arose.

For federally regulated companies, the Code allows employers to implement a direct deposit system without consulting their employees, and without acquiring the employee's consent, as long as the employee has access to a bank account from a financial institution. If an employee does not have access to a bank account from a financial institution, the employer must continue to pay that employee's wages by cash or cheque.

In Alberta, payments of wages must be made at least on a monthly basis (or more frequently) and within 10 consecutive days after the end of the pay period. Also, where a bonus forms part of the wages, it must be paid within 10 days after the end of the pay period subsequent to the one in which it was earned.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In British Columbia, payments of wages to employees must be made at least twice a month or more frequently. Moreover, a pay period must not be longer than 16 days, and all wages earned in a pay period must be paid within eight days after the end of the pay period.

Employers are permitted to implement a direct deposit system after obtaining the consent of their employees by contract or by collective agreement, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Manitoba, payments of wages to employees must be made at least twice a month or more frequently. Payments must be made within 10 working days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In New Brunswick, payments of wages to employees must be made at least twice a month or more frequently, but must be paid every 16 calendar days. Payments must be made within seven calendar days after the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Newfoundland and Labrador, payments of wages to employees must be made at least twice a month or more frequently. Payments must be made within one week of the end of each pay period.

Employers are permitted to implement a direct deposit system after obtaining the written consent of their employees, and as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In the Northwest Territories, payments of wages to employees must be made at least monthly or more frequently. Payments must be made within 10 days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Nova Scotia, payments of wages to employees must be made at least twice a month or more frequently. Payments must be made within five working days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Nunavut, payments of wages to employees must be made at least monthly or more frequently. Payments must be made within 10 days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Ontario, payments of wages to employees are not addressed by legislation. However, the payment of wages must be made no later than the regular established payday.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

There are some conditions imposed concerning direct deposits. An employer may only pay wages to the employee via direct deposit if: the account is in the employee's name; no person other than the employee or a person authorized by the employee has access to the account, and, unless the employee agrees otherwise, the financial institution is located within a reasonable distance from the location where the employee usually works.

In Prince Edward Island, payments of wages to employees must be made at least every 16 days and must include all wages earned up to and including a day that is not more than five working days prior to the actual payday.

The current employment standards law does not explicitly deal with direct deposit. But recent amendments tabled in legislature state that employers are permitted to implement a direct deposit system after obtaining the written consent of their employees, and as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Quebec, payments of wages to employees must be made at least twice a month or more frequently. Payments must be made every 16 days in general, and once a month for managers and contract workers. Moreover, any amounts earned for bonuses, overtime or other earnings in excess of regular wages must be paid with the next regular payment, or a time that is set out in a collective agreement or other contract. If a payday falls on a statutory holiday, the employee must be paid on the working day before the holiday.

Employers are permitted to implement a direct deposit system after obtaining the written consent of their employees, and as long as the deposit goes into a financial institution of the employees' choice. An employee may refuse to agree in writing to the transfer if the deposit is not made to the institution of the employee's choice; however, this rule does not apply where the transfer as well as the institution has been determined by a collective agreement. If employees do not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Saskatchewan, payments of wages to employees must be made at least twice a month or more frequently. If the majority of the employees work on an hourly, daily or weekly wage and desire a weekly payment, then the employer must comply with this request. Payments must be made within six days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

In Yukon, payment of wages to employees must be made at least twice a month or more frequently. Payments must be made within 10 days of the end of each pay period.

Employers are permitted to implement a direct deposit system without consulting or obtaining the consent of their employees, as long as the deposit goes into a financial institution of the employees' choice. If an employee does not have a bank account at a financial institution, employers must pay the wages by cash or cheque.

Pay cards a new form of method of payment?

We have been hearing a lot lately about paying employees' wages through pay cards because of Wal-Mart in the United States. It was recently reported that Wal-Mart Stores Inc., the largest private employer in the US, is eliminating paper payroll cheques, transferring workers' earnings to a debit card if they decline direct deposit to a bank. Some Wal-Mart workers have already started to receive earnings electronically in the form of credit to a MasterCard debit card.

Wal-Mart hasn't specified the savings it has achieved by the measure, but has said the shift will reduce its payroll costs.

A payroll card acts as a debit or credit card and allows employees to access their pay similarly.

Most major payroll service providers in the United States offer this payment method for employees that, for one reason or another, do not have access to a bank account (e.g., bad cheque history). Instead of an employee receiving a cheque, and paying up to 5–10 percent to cash it, the employee can have the direct deposit loaded onto a debit card. In this way, a company can save money on printing cheques, not buy expensive cheque stock, and not having to worry about cheque fraud due to a cheque being lost or stolen.

Consumer advocates in the US have criticized this payment method, noting that workers are often charged fees to access their money or even to check their balance. They also question whether this method could violate state wage payment and collection laws.

Pay cards are not an allowed payment method in law in Canada.

Summary

Direct deposit is a secure and efficient method of managing employee payroll and is expected to continue to increase in popularity for employers and employees.

Employers should make sure to inform employees of the following at the time of hire:

  • They will receive their pay by direct deposit
     
  • The procedures in place to initiate direct deposit such as the employee authorization form
     
  • Your privacy policy to ensure the employee that his or her banking data will be used for the intended purpose and will be secured



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