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Proposed Rule Has Big Implications for Direct Deposit

  • By Andrew Deichler
  • Published: 7/5/2016
The New York State Department of Labor has proposed a rule that could cause a major shakeup for companies’ payroll functions.

New York Labor Code 192 would prohibit companies from paying employees through direct deposit or paycard without the employees’ advance written consent. Each employee would have to be given a notice in his or her primary language containing:
  • A description of all wage payment options
  • Assurance that employees are not required to accept payment through direct deposit or paycard
  • Assurance that the employee will not be charged fees for services necessary to access his or her wages
  • For paycards, a list of nearby locations where employees can access and withdraw wages without charges.
Notices that fail to contain this information and any employee consent obtained from them would be invalidated. Until new notices are drawn up and new consent is obtained, companies would be required to provide employees with paper checks for payment.

New York businesses have until July 15, 2016 to submit comments on the proposed rule.

Implications for employers

One group that plans to submit a comment letter to the New York Department of Labor is NACHA, which has identified some major implications that the proposed rules on direct deposit would have for many companies. “Unless there is a change in the final rule, all existing direct deposit authorizations in New York for nonexempt employees will be deemed invalid unless all of the notice and consent requirements are satisfied,” said Bill Sullivan, senior director and group manager of government and industry relations for NACHA.

And it’s not just New York companies; the rules would also apply to all companies with nonexempt employees that work in New York. “So if you’re a Minneapolis company that has a New York employee, you’ve got to do this,” Sullivan said.

Furthermore, Sullivan noted that approximately 82 percent of companies in the United States use direct deposit for payroll. If other states follow New York’s example here, corporate treasury functions across the U.S. could be dealing with a lot of payroll-related headaches.

In addition to the administrative burden, the rules would also increase costs for companies substantially. There are substantial savings businesses achieve through direct deposit; NACHA estimates that issuing paper checks costs companies between $2.87 and $3.15 per check. “Even if you don’t go by those numbers, the federal government—the largest user of the ACH network—publicly has stated that it costs $1.25 to create a check. And you know that it’s much cheaper for the federal government to create a check than a business. So it’s going to be a great expense to employers,” Sullivan said.

Finally, introducing more checks into the system creates a greater chance for fraud. While business email compromise (BEC) scams and data breaches may be the hot fraud threats today, check fraud is still a huge problem for corporate treasurers. According to the 2016 AFP Payments Fraud and Control Survey, underwritten by J.P. Morgan, checks continue to be the payment method most targeted by fraudsters, with 71 percent of companies admitting to experiencing actual or attempted check fraud. Just imagine what could happen if 82 percent of businesses are forced to issue paper checks, even for a short period of time.

While NACHA is fairly sure that the proposed rules will pass, the electronic payments association hopes to persuade the New York Department of Labor to modify some of the requirements so that they do not cause such a drastic shakeup for companies. “Perhaps all that is needed is simply the reassurance that employees can opt out of direct deposit at any time,” Sullivan said. “Direct deposit is governed by Regulation E, the NACHA Operating Rules and all applicable state laws, and in all cases, you are allowed to opt out. So instead of forcing everyone to opt out and then opt back in, maybe the disclosure statement could just explain that you have the right to withdraw your direct deposit at any time.”

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