Problem/Background: Many employers offer direct deposit because of the savings in the cost of printing and distributing checks. According to a 2003 survey by the American Payroll Association, over 90 percent of employers offer direct deposit to all employees. Federal law does not expressly authorize or prohibit employers from requiring payment by electronic transfer. Most states prohibit employers from requiring direct deposit and specify that employers must obtain each employee’s voluntary consent in order to use direct deposits or electronic transfers for pay purposes. Most states, including Michigan, require that the consent be in writing. Ten states reportedly allow employers to require pay by direct deposit.

Use of direct deposit has increased rapidly, hitting record levels in 2000 when 100 million Americans used it to receive payments or government benefits. More than half of all workers use direct deposit for paychecks. Direct deposit is also used by most Social Security recipients.

In recent years, a new technology called pay cards has been developed that shows promise in persuading employees who are otherwise reluctant to participate in direct deposit plans to accept their pay via a debit card. A study by Visa found that such cards have strong appeal from workers earning less than $25,000 who don’t have a checking account. Hispanic workers also showed a preference for pay cards over direct deposit. However, use of pay cards is still small. Only about 3.5 percent of employers responding in an American Payroll Association survey stated that they used payroll debit cards.

Description of Bill: The bill amends Section 6 of Act 390 of 1978 by allowing direct deposit or electronic transfer of an employee’s wages. The direct deposit or electronic transfer would be required to go to the employee’s account at a financial institution or to an account maintained by the employer in the name of and owned by the employee that is accessible to the employee by access device.

Pay cards offer an alternative to direct deposit. This option provides a means of extending many of the benefits of direct deposit to employees who do not have a bank account.

Summary of Arguments

PRO:

Direct deposit is good for business and good for consumers. By electronically depositing checks into employee accounts, the costly business of writing checks is eliminated. The nuisance involved in stopping payment on lost or stolen checks and reissuing checks would be eliminated. The employee also saves valuable time by avoiding trips to the bank to cash or deposit checks.

Con:

Although direct deposit or electronic transfer should be encouraged, it should remain voluntary.

Although pay cards offer an alternative to direct deposit, participation should remain voluntary. Also, the bill does not address the issue of who is responsible for covering the fees associated with the employee’s account.

Fiscal/Economic Impact:

(a) Department

Budgetary: The bill may increase the department’s costs related to investigating complaints under the Wages and Fringe Benefits Act.

Revenue: There are no revenue implications in the bill.

Comments:

(b) State

Budgetary: The state as an employer would be permitted to require direct deposit or electronic transfer of pay to an employee’s account.

Revenue: There are no revenue implications in the bill.

Comments:

(c) Local Government

Comments: Local governments as employers would be permitted to require direct deposit or electronic transfer of pay to an employee’s account.

Other State Departments: The bill also affects the Departments of Management and Budget and Treasury.

Any Other Pertinent Information: The Senate Local, Urban and State Affairs Committee has reported a similar bill.

Administrative Rules Impact: No new or revised administrative rules will be required.