Use direct deposit to reduce payroll costs - direct deposit of payroll

Healthcare Financial Management, July, 1992 by Leslie N. Masonson

Saving money is still the name of the game in this difficult economic environment. One area often overlooked in cost reduction efforts is the payroll department. A good way to save money is to use direct deposit of payroll (DDP) in place of issuing paper payroll checks.

Many financial managers incorrectly consider payroll not in their purview, and therefore do not give it much thought. Moreover, very few healthcare organizations have ever calculated the cost benefit of using payroll direct deposit.

Significant savings are possible, particularly with high levels of employee participation. Even though employees must still receive a pay stub, generating an electronic payment has a financial benefit. Companies with DDP systems in place have estimated savings ranging between $0.25 to $1.25 per check.

For a healthcare facility with 3,000 employees who are paid twice a month, the annual savings would be $36,000, given a $1 savings per check and assuming that 50 percent of the employees are signed up for DDP.

DDP not popular. Currently, only 22 percent of all U.S. employees are paid by direct deposit, even though some organizations have yearly DDP sign-up campaigns and stuff pay envelopes with promotional literature. In Japan and Europe, direct deposit usage rates range from 75 percent to 99 percent.

Direct deposit of payroff has been most successful among white-colar and salaried workers, but more blue-colar and hourly and parttime workers are signing up as they begin to see the significant benefits to be granted.

One major obstacle is that workers who do not have bank accounts cannot receive their pay electronically. There are ways around this. For example, Manufacturers Hanover Trust Company, based in New York City, has introduced an innovative electronic payroll service that does not require maintaining a bank account. Employees are issued automated teller machine (ATM) cards that can be used to withdraw funds from a nationwide network of ATM machines.

When an employer cannot mandate direct deposit participation, it can offer to pay for bank accounts for those employees who do not have them. In fact, some banks offer free accounts for DDP customers.

State labor code data. The National Automated Clearing House Association (NACHA), based in Herndon, Va., is a trade association that forms the cooperative foundation for the ACH payments system through a network of 42 associations. The ACH system processes more than 1.5 billion transactions a year for some 15,500 financial institutions, 130,000 corporations, and millions of consumers.

NACHA surveys state labor departments to determine their restrictions on direct deposit programs for employees of private companies. The NACHA study provides useful and timely information about specific labor code and labor department positions that restrict how corporations can implement DDP programs.

In the past year, NACHA surveyed labor departments in all 50 states and the District of Columbia. It found that 37 states require voluntary employee consent for enrollment in a direct deposit program. However, 14 states allow employers to mandate DDP without employee consent. These states are: Alabama, Illinois, Indiana, Kentucky, Louisiana, Maine, Missouri, Nebraska, New York (for employees earning more than $300 a week), Ohio, North Carolina, South Carolina, South Dakota, and Tennessee. This information should be useful for financial managers who were not aware that their companies can force employees to participate.

Although the NACHA survey provides information from state labor departments and labor codes, financial managers looking for legally binding pronouncements should contact specific labor code departments using the phone numbers provided in the NACHA survey. To obtain a copy of the most recent state labor code survey call Stephen Lewis of NACHA at (703) 742-9190.

Review DDP benefits. Work with the payroll or accounting manager to determine the actual cost of offering employees paper checks compared to direct deposit and analyze both tangible and intangible benefits to your facility. To help perform this analysis, obtain a copy of NACHA's pre-formatted analysis sheet that lists items to be included in the calculations.

Develop a marketing campaign. Once it is determined that DDP is profitable and worth the effort, develop an aggressive internal marketing plan. Continuous marketing and word of mouth from satisfied employees are the two best methods of increasing participation in a direct deposit program.

The following steps should help make the program successful: 1. Review state labor laws and check with personnel and legal departments before making DDP mandatory. 2. Ask your cash management banker for DDP information brochures, posters, videos and for an on-site presentation to your employees. Also, contact NACHA for information it can provide. 3. Use every opportunity - bulletin boards, envelope stuffers, messages from the senior management - to promote DDP. 4. Do not give new employees the opportunity to choose between a check or DDP. Instead, offer DDP exclusively, within the parameters of your state labor law. 5. Keep abreast of the latest developments in electronic funds transfer by reading cash management journals or newsletters, and by attending pertinent conferences or seminars.