A major task for the payroll staff is to issue paychecks to employees. This task can be subdivided into several steps. First, the checks must be printed – though it seems easy, it is all too common for the check run to fail, resulting in the manual cancellation of the first batch of checks, followed by a new print run. Next, the checks must be signed by an authorized check signer, who may have questions about payment amounts which may require additional investigation. After that, the checks must be stuffed into envelopes and then sorted by supervisor (since supervisors generally hand out paychecks to their employees). The checks are then distributed, usually with the exception of a few checks that will be held for those employees who are not currently on-site for later pick-up. If checks are stolen or lost, the payroll staff must cancel them and manually issue replacements. Finally, the person in charge of the bank reconciliation must track those checks that have not been cashed and follow up with employees to get them to cash their checks – there are usually a few employees who prefer to cash checks only when they need the money, surprising though this may seem. In short, there are a startlingly large number of steps involved in issuing payroll checks to employees. How can we eliminate this work?
We can eliminate the printing and distribution of paychecks by using direct deposit. This best practice involves issuing payments directly to employee bank accounts. Besides avoiding some of the steps involved with issuing paychecks, it carries the additional advantage of putting money in employee bank accounts at once, so that those employees who are off-site on payday do not have to worry about how they will receive their money – it will appear in their checking accounts automatically, with no effort on their part. Also, there is no longer a problem with asking employees to cash their checks, since it is done automatically. Further, there is no longer any need to have an elaborate set of controls designed to store and track unused checks.
It can be difficult to get employees to switch over to direct deposit. Though the benefits to employees may seem obvious, there will be some proportion of employees who prefer to cash their own checks, or who do not have bank accounts. To get around this problem, an organization can either force all employees to accept direct deposit, or only do so with new employees (while existing employees are allowed to continue taking paychecks). If employees are forced to accept direct deposit, the company can either arrange with a local bank to give them bank accounts, or issue the funds to a debit card. Some companies also use raffles and other promotional devices to reward those employees who switch to direct deposit.
Another problem is the cost of this service. A typical charge by the bank is $0.50 for each transfer made, which can add up to a considerable amount if there are many employees and/or many pay periods per year. However, banks also charge a fee to process checks, so the net cost of processing a direct deposit instead of a check is relatively low. Also, this problem can be reduced by shrinking the number of pay periods per year. Also, one must factor in the time lost when employees go to the bank to deposit their checks; this factor alone makes the switch to direct deposit a cost-effective one.
Implementing direct deposit requires one to transfer payment information to the company’s bank in the correct direct deposit format, which the bank uses to shift money to employee bank accounts. This information transfer can be accomplished either by purchasing an add-on to a company’s in-house payroll software, or by paying extra to a payroll outsourcing company to provide the service – either way, there is an expense associated with starting up the service. If there is some trouble with finding an intermediary to make direct deposits, this can also be done through a Web site that specializes in direct deposits. For example, www.directdeposit.com provides this service, and even has upload links from a number of popular accounting packages, such as ACCPAC, DacEasy, and Dynamics GP.