Pay Card vs. Direct Deposit vs. Paper Check

For small business owners with employees, payroll is a topic that’s always front of mind. There are several legal ways to pay employees. Here’s a primer on pay cards, direct deposit, and paper checks, along with the pros and cons of each one.

(Some states have labor laws that determine payroll frequency and type of payment. Always check with your state’s regulations to ensure compliance.)

Pay Card

A pay card is similar to a debit card: the company deposits the amount of the employee’s wages into an electronic account that’s only accessible via the pay card. The cards are typically administered by a third-party company that receives money from the company and disperses it to the individual employee cards. The employee can make point-of-sale purchases, pay bills electronically, and withdraw cash up to the amount of the deposit of their wages.

Pros:

• For employees without a bank account, a pay card gives them access to their wages without requiring them to cash their check. These employees can use their pay card for transactions where cash isn’t accepted.
• Wages are typically available instantly, without the hassle of cashing or depositing a paper check.
• Transactions require a PIN for extra security.
• Most employees will only need one pay card for the duration of their employment; you can load the same one each payday.
• Offering pay cards can be beneficial even for employees with bank accounts, and may be seen as a company perk for those employees who may use it for budgeting purposes.
• Pay cards have no effect on a person’s credit rating.

Cons:

• Your company may be unwilling to pay the upfront fees to establish a pay card system.
• Some states have legal requirements around pay cards that the company and employees must be aware of and follow.
• A pay card is a physical object that can be lost or stolen, requiring some administrative time to replace.

Paper Check

For decades, the paper check was the only available option to distribute wages to employees. To use this traditional method, the company processes the payroll and either hand-writes or electronically generates a paper check drawn on the company bank account. The checks are hand-distributed at the office or mailed to employees on or before the designated payday, typically along with a pay stub describing tax deductions.

Pros:

• It’s a simple and familiar method.
• Employees don’t need a bank account. They can receive cash at a check-cashing service for a fee.
• Paper checks give employees control over where and when they want the money deposited. If they want to change which bank account the money goes into, the company doesn’t have to be involved. 
• Some employees may see a paper check as security aware, since they’re not required to provide the company with bank account information.
• A check is tangible proof of payment. It may inspire more confidence than an electronic transfer.

Cons:

• Employees must deposit the check during limited bank hours. Even mobile deposit has cutoff times for immediate availability.
• Some banks may put a hold on the funds for several days, leaving employees without the money.
• Generating physical checks is an added expense for the company. It may take extra personnel at the company to administer paper checks, and an outside payroll service will charge more for delivering physical checks/
• If employees are out of the office on payday, they may not get their check until days after payday. It puts extra pressure on the payroll department to keep track of who has received their checks.
• If a check is lost or stolen, there’s a risk that the company’s bank account information may not be secure, and re-issuing a new check takes time.

Direct Deposit

Direct deposit refers to an electronic deposit of funds into a bank account via ACH transfer. For employees to receive their wages by direct deposit, they must provide the company with their bank account and routing number(s). The company deposits the wages from its bank account directly into the employee’s bank account on payday and typically provides an electronic paystub with wage and tax deduction information.

Pros:

• Employee wages are available without requiring a trip to the bank.
• Saves the company money on administrative costs associated with paper checks or pay cards.
• It doesn’t require employees to be in the office to collect a paycheck, which works well for companies with workers who work remotely or travel frequently.
• Employees can designate multiple checking or savings accounts to divide their paycheck, which can help them with personal financial goals.
• Most banks do not charge extra for this service, and some even give perks to customers for using direct deposit.

Cons:

• It can take 1-3 days for the money to be available, so the company must factor in this processing time to ensure the wages are deposited on the right day.
• Bank holidays can affect the processing time.
• Direct deposit isn’t possible for employees without a bank account or who don’t want to share that information with the company.

With payroll, there’s no one-size-fits-all option. What works well for one small business may not be ideal in another industry. Sometimes, providing options is the best way to make sure all employees are paid fairly and on time. 

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