When an employee leaves your organization, one of your final orders of business is to cut their last paycheck. The legal requirements for how and when a departing employee must be paid vary by state. Learn how to manage your compliance obligations.
When an employment relationship ends, the employer might be left with questions about final pay:
- When is the final paycheck due?
- How must the employee be paid?
- Can equipment or other supplies the employee failed to return be deducted?
- Can salary advances be deducted?
Note that federal law does not require employers to cut a departing employee’s paycheck right away. But some state laws may, according to the Department of Labor. Thus, the first step in determining your compliance obligations is to look at applicable state laws governing the timing and manner of issuing final pay.
When an organization and its employees are based in the same state, the laws governing the employment relationship are pretty clear. But with the increase in remote work, it’s not uncommon for an employer to have employees in multiple states. A common misconception is that the laws of the state in which the employee is based govern the employment relationship. This isn’t always the case.
According to Trimboli & Prusinowski, this type of situation requires a “choice of law” analysis of the individual circumstances to determine which state law governs. To get ahead of potential choice-of-law questions, figure out which state law is likely to take precedence and address this in your employee handbook and any applicable employment agreements. Consult with counsel as needed.
A closer look at obligations under state law
Some states don’t have laws mandating the timing of final pay: Alabama, Florida, Georgia and Mississippi. In these states, Epstein Becker Green (EBG) recommends issuing final pay on the next scheduled payday.
Other states have highly specific laws governing final pay, and failure to adhere to these laws can lead to high penalties and lawsuits. For example, in California, final pay is due within 72 hours of a resignation and immediately upon termination. If the employee gives over 72 hours’ notice before resigning, the final paycheck must be given on their last day of employment.
Here are some questions organizations should be prepared to address when reviewing applicable state laws:
- Does the nature of discharge have any impact on the timing of the final paycheck? In other words, does it make a difference if the employee quit, was laid off or was fired?
- What happens if wages are owed because of a temporary layoff or suspension due to a labor dispute?
- Are there any specific requirements regarding the manner of payment?
- If an employee requests to be paid by mail or another method, does the organization have to honor that request?
- Does the law address how unused or accumulated vacation, annual leave, holiday leave, paid time off (PTO) and bonuses are to be paid?
- What penalties could the organization face for failure to comply with applicable laws?
Keep in mind that this list is not exhaustive. Rather, these questions are intended to get you thinking about the types of issues you may need to address.
Note that if state law is silent on issues like whether unused time is earned and payable to departing employees, see what your employee handbook says.
According to Wade Herring II, a partner at Hunter MacLean, accrued PTO constitutes earned compensation in California and must be included in the final payment. But in Georgia, an organization’s internal policy dictates how to handle this.
State laws can be tricky, but educating yourself now can help you avoid compliance missteps in the future.
Deductions from final pay
Another issue to contend with is how to recover money a departing employee owes to the organization. If an employee refuses to return a piece of equipment, the knee-jerk reaction may be to deduct the cost of the item from their final paycheck. But that’s a bad idea, reports EBG.
Most states do not permit these types of deductions unless there’s a written agreement between the employer and employee outlining rights and responsibilities concerning equipment.
If you find yourself in this situation, the best course of action is likely to forget about it, unless the cost of the equipment, uniform or other item justifies taking the employee to court. Still, pursuing that avenue may not be worth the organization’s money or time, according to EBG.
With respect to salary advances, federal law doesn’t bar this type of deduction, but applicable minimum wage requirements still apply. And state laws may have specific limitations, so it’s best to seek legal counsel before attempting any kind of salary deduction.
Withholding expense reimbursements
Another question employers often have is whether they can withhold reimbursement for expenses. This is also a potentially litigious issue, so you should proceed with caution when attempting to withhold reimbursements.
The first question to ask is whether reimbursements should be counted as wages under applicable law, notes EBG. While the Fair Labor Standards Act does not classify reimbursements as wages or include them in the regular rate of pay for calculating overtime, employers need to be careful not to make improper deductions that could bring an employee’s pay below the required minimum wage.
If you are considering withholding expense reimbursements to offset the cost of property an employee fails to return, tread carefully. For example, Jones Day cites an amendment to the Illinois Wage Payment and Collection Act requiring employers to reimburse all “necessary expenditures or losses” that occur during the scope of employment, unless certain exceptions apply:
- The employee’s negligence causes the loss.
- The loss is due to normal wear.
- The loss occurs due to theft that’s not the result of the employee’s negligence.
Illinois, California, Iowa, Massachusetts, Montana, New Hampshire, North Dakota, Pennsylvania, South Dakota and Washington, D.C. also have laws addressing expense reimbursements. If the question of withholding reimbursements arises, Jones Day recommends consulting with a local labor and employment attorney.
A knowledgeable attorney can explain whether state law speaks to this issue and if any case law, state labor department regulations, opinion letters or other guidance may be instructive as to how to proceed.
Get familiar with state law
Final paycheck administration generally falls under state law, so becoming familiar with the requirements of applicable state laws can save your organization valuable time and reduce the risk of legal missteps.
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For support on this topic contact our OneGroup HR Consulting team.
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