Before I was a Payroll Specialist, I was an “HR-Department-of-One,” and let me tell you– few things could cast a cloud over the joy of payday quite like an employee storming up to me to tell me they didn’t get paid. This is our most basic duty as an employer, right? They perform a skill and then we pay for their time and effort. Add to that, the recent poll showing 61% of Americans are living paycheck-to-paycheck, and it’s safe to assume that your employee was counting on that money and needs this addressed immediately.
Besides reassuring the employee that this has your full attention, I find that it helps to understand what’s happening behind the scenes so you can set the most accurate expectation for your employee.
We hear it used all the time, but what is direct deposit? To put it simply, direct deposit is an electronic payment of funds from one bank account to another, in this case, your company’s bank account to the employee’s bank account. If you want to get into the nitty-gritty of it, direct deposit is an “ACH payment,” which is the classification banks use for these types of electronic, automatic transfers of deposits between banks. They are called ACH payments because (in the U.S.) they are managed by a financial network called the Automated Clearing House, which moved nearly $73 Trillion in 2021 alone!
What’s actually happening with a direct deposit?
You’ve hired Joe Employee into your company and input his routing and account number for direct deposit into payroll. How does that money move from your company to Joe’s account?
- You (or your payroll provider on your behalf) initiate a direct deposit with the company’s bank by sending an electronic file. This file includes account information and amounts for each employee being paid.
- The bank then takes all direct deposits it has received from various companies, bundles them up, and sends them off to the ACH.
- The ACH receives those orders from the banks and proceeds to sort and disperse them out to each employee’s bank.
- Joe’s bank receives the ACH order and posts the credit to his account. All of this happens quickly, in just 1-2 business days!
What causes a direct deposit return and how can I prevent it?
The banks & ACH did their part, but Joe still didn’t receive his funds. Where did it all go wrong? There are a few things that may have interrupted that money from going where it needed to:
- Missing or incorrect account information
- A missing or incorrect routing number
- An existing routine or account number for an account that doesn’t belong to you
- A frozen bank account, or one that has been closed
These pitfalls can be easily avoided by requesting either a voided check or a letter from the employee’s bank to set up their direct deposit. It can also help to have a communicated deadline for payroll changes so that employees know when they must notify you of any changes to their account information.
What happens after the direct deposit is returned?
If Joe’s bank is unable to deposit the funds, they will be returned to the ACH, typically within 2 business days of the pay date. It could then take 2-3 business days for the funds to be returned to your company. Once you’re notified, be sure to deactivate the invalid account so that no future deposits will be attempted. Once funds are returned to your company’s account, you can arrange payment directly with the employee by manual check or an alternate method.
Ultimately, returned direct deposits can be a stressful situation for both the employee and you, the HR contact. It is important to put some systems in place to prevent these mistakes from happening and provide you and your employees the peace of mind knowing their paychecks will arrive on time.
Got more questions about payroll or HR common problems? We have a team of nerds (just kidding, here we call them experts) who would love to help you problem-solve those roadblocks. Book a call with one of us below to learn more about how Whirks can help simplify things for your business.