Employees quit their jobs or get fired every day in the working world. Despite the commonality of it, separations from employment often end up being a compliance challenge for employers. That’s because strict laws require employers to be ready to quickly pay departing employees all they are owed, even if the separation is sudden and completely unexpected.
An employer that does not carefully comply with the final pay laws could end up in court facing hefty civil, and possibly criminal, penalties and fines and – in the worst case scenario – even jail time.
Final wage payments are governed by state law to some extent in every state except:
- Florida; and
The vast majority of state final pay laws dictate when, what and how to pay based on the nature of the employee’s departure. There is much variation among state laws, however, and there are also exceptions for certain types of employees (e.g., transitory or commissioned employees) and situations (e.g., layoffs, labor disputes).
In addition, the terms of any applicable employer handbook policies, employment contracts and/or collective bargaining agreements must also be taken into account. Even in the states that do not have a final pay law, an employer may still be bound by the terms of an applicable policy, contract and/or agreement.
The best way for an employer to ensure compliance with the full range of these requirements is to break the final pay process down into five key steps:
- Determine when to pay;
- Determine what to pay;
- Reconcile the terms of any applicable company policies, employment contracts and/or collective bargaining agreements;
- Calculate tax withholding and any other required or permitted deductions; and
- Choose the payment method.
Step 1: Determine When to Pay
Most state laws make a distinction between when the final payment must be made based on whether the employee was fired – an involuntary termination – or has quit – a voluntary separation. Under most such laws, involuntarily terminated employees must be paid immediately (e.g., at the time they are told of the termination), and employees separating voluntarily must be paid by the employee’s next regular pay day.
Fortunately, if speed is an issue, there may be exceptions to this basic framework under any particular state’s law that can buy the employer more time to make the payment. For example, it may be okay to delay the final payment until a later allowable time if the employee had control of company money or property and the employer wants to make a final accounting first, or if the employee did not give adequate advance notice of quitting and the payroll department cannot process the payment quickly enough. An employer should always check state law to see if there is any breathing room regarding the timing of the final payment.
Step 2: Determine What to Pay
State law may or may not dictate exactly what to include in final pay. For example, an employee may be owed more than his or her regular wages earned (i.e., guaranteed weekly salary for an exempt employee, or amounts earned at the regular hourly rate of pay, plus overtime, for a nonexempt employee). Such additional amounts may include:
- The value of any accrued, unused vacation and/or other personal time; and/or
- Any supplemental wages, such as lump-sum severance payments, commissions, stock options, or cash bonuses.
An employer should also check the terms of any applicable employer policy, employment contract and/or collective bargaining agreement in this regard, especially if state law is silent on what to include.
Step 3: Reconcile the Terms of Any Applicable Company Policies, Employment Contracts and/or Collective Bargaining Agreements
If there is an applicable employer policy, employment contract and/or collective bargaining agreement in addition to state law, the terms of each must be reconciled. The following three baseline rules should be kept in mind:
- An employer may follow a policy, contract or agreement that is more beneficial to the employee than state law, but not one that is less beneficial.
- If state law does not say what to include in final pay, the terms of any applicable policy, contract and/or agreement should be followed.
- If state law does not say what to include and there is no applicable policy, contract and/or agreement, the employee should be paid all wages earned up to the time of separation.
Step 4: Calculate Tax Withholding and Any Other Required or Permitted Deductions
The next step is to determine what must be deducted from the payment to arrive at the employee’s final take-home pay. These deductions generally include:
- Federal, state and local income taxes, and employment taxes (Social Security and Medicare/FICA taxes, and state unemployment and/or disability insurance taxes in some states);
- Those required by law to be remitted to various government agencies or other authorities to satisfy certain types of unpaid debts (e.g., amounts owed for child support, garnishment, tax levies, bankruptcy orders, student loan debts);
- Those the employee has voluntarily chosen or agreed to have deducted (e.g., to pay for health and retirement plan benefits, union dues, charitable contributions); and
- Those the employer is permitted to make by state law with the employee’s consent and that would not violate minimum wage and/or overtime pay requirements (e.g., to pay for medical exams taken as a condition of employment or company uniforms, to recoup cash shortages or unrepaid pay advances).
Step 5: Choose the Payment Method
Employers usually make final payments via the state-law-authorized method they usually use to pay the particular employee (e.g., check, direct deposit or paycard).
However, if immediate payment is required for an involuntary termination, the terminated employee may have to be paid by paper check due to the lack of lead-time required for payment by direct deposit and paycard.
Note that the law in some states requires certain employees to be paid in person, or by mail to the employee’s last known address if the employee cannot be located, or at a certain location (e.g., on the farm or at the warehouse where the work was performed) if paying in cash or by paper check.