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A Better Partnership


May 2006
May 15, 2006

Understanding the Rules for Direct Deposits and Deductions

Most employers use direct deposit to process employee payroll. Likewise, many employers utilize payroll deductions for various employee obligations. If you are one of those employers, you should know the rules.

Under Michigan's payment of wages law, private-sector employers generally may not mandate direct deposit of employee payroll. In order to pay employees by direct deposit, the employee must give his or her written consent without intimidation or threat of discharge. The primary exception to this general rule is where direct deposit is required as part of a collective bargaining agreement. Although an employer may not mandate direct deposit, it can "incentivize" employees to utilize direct deposit. This can include paying employees by direct deposit on a different (often earlier) day of the week or mailing (instead of hand delivering) paychecks to employees who choose not to participate in direct deposit.

There is a recent amendment to the law which allows employers to pay with a no-fee payroll "debit" card. However, unless the employer was doing so prior to January 1, 2005, it must also get the employee's written consent before paying in this fashion. Employers who were paying by debit card on or before January 1, 2005, are permitted to continue that process for all employees and do not need employee consent. No fees or costs can be charged to the employee for a debit-card payroll system.

Like direct deposit, most payroll deductions also require the consent of the employee. Consent is not needed for deductions required by law or permitted by statute (income taxes, social security) or a collective bargaining agreement. Consent is also not required if the deduction is a result of an inadvertent wage or fringe benefit overpayment if certain very specific conditions are met. Those conditions are too numerous and too detailed to explain here, but if you are interested, let us know and the information will be provided.

In all other instances, a written voluntary consent is required for deductions from an employee's wages. This remains true even at termination. If the deduction is "for the benefit of the employee" (e.g., health insurance, loans or payroll advances, tool purchases), the employee needs to provide only one written authorization. On the other hand, if the deduction is "for the benefit of the employer" (e.g., to repay cash shortages, to replace lost or broken tools or equipment), the employee must provide a separate written authorization for each deduction. This means a separate authorization for each payroll period showing the amount to be deducted from each paycheck. Regardless of the type of deduction, each deduction must be substantiated in the records of the employer and must be identified as pertaining to the applicable employee.

These are only a few of the rules that apply to wages and fringe benefits in Michigan. There are many others as well. If you do business in states other than Michigan, be aware that different rules will apply because each state has its own unique laws. If you need assistance with any of the Michigan rules or learning the rules that may apply in other states, please contact anyone in our Labor and Employment Law Practice Group.



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