Failure to provide final pay in accordance with applicable laws may result in fines. Develop policies and procedures to ensure compliance.

When an employee leaves your company, you have a responsibility to ensure that they receive their final pay in accordance with federal and state law. Generally, these laws dictate when you must provide the employee with their final pay, where it must be delivered, and what the pay must include. Below, we provide answers to frequently asked questions about this topic:

Q: When is final pay due?

A: Under federal law, final pay is generally due by the next regular payday, but many states require it sooner. In some cases, this time frame differs depending on whether the employee initiates separation (voluntary termination) or the employer initiates separation (involuntary termination).

Here are two examples:

  • California: The state requires final pay immediately for involuntary terminations. For voluntary terminations, California requires final pay within 72 hours. However, if the employee provides at least 72 hours of notice, final pay is due on the employee's last day.
  • Texas: For involuntary terminations, final pay is due within six days of their date of termination. When an employee quits or resigns, they must be paid in full no later than the next regularly scheduled payday after the effective date of the resignation or retirement.

Note: Some states have separate final pay deadlines and other rules for commissions, bonuses, and other special situations.

Q: Do I have to pay employees for unused vacation when they leave?

A: It depends on your state and company policy. States generally handle unused vacation and paid time off in one of three ways:

  • Employers must pay employees for accrued, unused vacation time at the time of separation;
  • Employers can exclude unused vacation time from final pay only if they have a written policy that explicitly states that employees will not be paid for any accrued, unused time upon separation; or
  • Employers can exclude accrued, unused vacation from final pay absent a policy that says otherwise.

Check your state law to determine which one applies to you.

Q: Do I have to pay employees for unused sick leave at the time of termination?

A: Most sick leave laws don't require employers to pay employees for accrued unused sick leave at the time of separation. However, if you bundle all leave, including sick leave, into a single paid-time-off (PTO) policy, your state may apply the same rules as it does for accrued, unused vacation/PTO (which could require payout upon separation). Check your state law to ensure compliance.

Q: Can I just mail final pay to the departing employee? Can I provide final pay via direct deposit?

A: Many states have rules about the location and method for final pay. For example, in California, the employee must receive their final pay at the place of discharge in the case of an involuntary termination. When an employee resigns or retires, California requires that employees receive their final pay at the office of the employer in the county they had been performing labor. Employees who quit or retire without providing a 72–hour notice are entitled to receive payment by mail if they request and designate a mailing address. The date of the mailing constitutes the date of payment for purposes of the requirement to provide payment within 72 hours of the notice of resignation/retiring. In California, for both voluntary and involuntary terminations, an employee who has authorized final pay by direct deposit may receive final wages in this manner provided the other final pay requirements are met. Check your state law for details.

Q: An employee quit and has failed to return a company computer. Can I withhold their final paycheck until they return it?

A: As a general rule, you may not withhold final pay until an employee returns company equipment. You must meet the applicable final pay deadline even if the employee hasn't returned company property.

Q: Instead of withholding the entire paycheck, can I make a deduction from the employee's final check to help pay for unreturned equipment?

A: The federal Fair Standards Labor Act (FLSA) doesn't permit this type of deduction from exempt employees' pay. For non-exempt employees (those entitled to the minimum wage and overtime), the FLSA permits employers to make deductions from employees' pay for lost/stolen/unreturned equipment provided it does not reduce the employee's pay below the minimum wage and does not cut into any overtime pay. Some states prohibit this practice or have additional requirements, so check your state law before making a deduction.

Note: Under the FLSA, employers are generally required to obtain an employee's consent before making a permissible deduction. The agreement must specify the particular items for which deductions will be made (e.g., company uniforms, equipment, or employee theft) and how the amount of the deduction will be determined. It is a best practice to obtain the employee's authorization in writing and consult legal counsel before making a deduction.

Q: An exempt employee who typically works Monday through Friday resigned. Their last day is Wednesday. Do I have to pay their full salary for that final week even though they will only work part of it?

A: Apart from a few narrow exceptions, the FLSA requires employers to pay exempt employees their full salary for any workweek in which they perform work. However, if an exempt employee doesn't work a full workweek in their first or last week on the job, the FLSA allows you to prorate the employee's salary for that workweek so that it only covers the days worked.

Conclusion:

Failure to provide final pay in accordance with applicable laws may result in fines. Develop policies and procedures to ensure compliance.

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This article was originally published as an "ADP HR Tip of the Week" which is a communication created for ADP's small business clients.

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