How to Avoid Problems Terminating an Employee with Direct Deposit

Many companies make use of the advantages of paying their employees via Direct Deposit. It eliminates all the hassles associated with paper checks and thus saves money and time. Add in a completely paperless payroll process and employers see even more advantages.

There can, however, be pitfalls in the direct deposit process as it relates to newly terminated salary employees.

We have seen employers forget to terminate a salary employee in their payroll system. Because the ex-employee was salary and thus most likely having a pay check automatically generated for them, the system automatically generates a direct deposit (ACH)) transaction paying the terminated employee money they might not have been supposed to receive.

If this occurs, the employer has 2 options:

1. They can perform an ACH reversal
2. Simply ask the employee to return the funds

In both cases, the employer hopes that the ex-employee is cooperative. Most times, this is the case. But if the termination was not friendly, the employer will often find themselves out the funds.

If the employer tries to collect the payroll funds via an ACH reversal and the employee has already withdrawn the funds from their account, not only will the employer be out the funds, but they will also incur additional expense due to a NSF (insufficient funds) ACH transaction.

If the employer ends up being out the funds, probably the only way they will recover their money is through legal action against the uncooperative individual.

So what is the best solution?

As soon as it is determined that a salary employee is to be terminated, immediately notify the payroll administrator so that they can adjust the payroll system accordingly. One adjustment the payroll administrator can make is turn off the individual’s Direct Deposit. This will result in the advantage of a final paycheck that will have to be given directly to the terminated employee.

Why is this advantageous for the employer?

Primarily because it will allow the employer to verify and confirm the amount being paid to the terminated employee. If the employee did not work a full pay period, the amount paid may be adjusted accordingly from the full salary. If the employee owed the company money, the administrator can confirm the company received the money owed from the final paycheck. Most importantly, management will know that you have stopped paying an individual who should no longer be getting a paycheck.

You are not obligated to pay that terminated employee via direct deposit on that final paycheck. By working with your payroll administrator and turning off the direct deposit process, your company can help control the unexpected loss of payroll funds.