Tips for Obeying Final Pay Rules

When the employment relationship ends, it’s up to HR to manage the final details, including making sure workers get paid for the hours they put in at the end. That’s not always as straightforward as it may seem, since the rules vary on how and when it should happen. Can you send the last check in the mail on the next scheduled payday? Does accrued vacation time need to be paid out? The answers depend on where the employee works. 

The federal Fair Labor Standards Act is silent about final pay, but many state laws address the issue. 

“The final pay requirements under state law vary substantially from state to state,” according to Chuck McDonald, an attorney with Ogletree Deakins in Greenville, N.C. 

However, when determining the timing, most state laws fall into one of two buckets, says Joel Rice, an attorney with Fisher Phillips in Chicago: The paycheck must be given to the employee either on his or her final day or by the next regularly scheduled payday. 

An employee in Kansas, for example, can be compensated on the next payday, whereas a worker who is fired in Missouri must be paid immediately upon termination.

The penalties for noncompliance can be steep. “Whenever feasible, it is safer to have the final paycheck ready by the employee’s last day whenever the employer knows in advance what the final day of employment will be,” Rice says.

Here are some questions to consider when deciding the best strategy for your organization.

Who Ended the Relationship?

Some states apply different rules when an employee is fired (or laid off) versus when a worker voluntarily resigns. Under California and Massachusetts law, for example, employees who are involuntarily terminated must receive all of their wages on the last day of employment. 

However, a Massachusetts worker who quits may have to wait until the next regular payday or the following Saturday.

California law is more complicated. Employees who give at least 72 hours of notice must receive their last earnings immediately at the time of separation. But workers who leave without providing such notice may be given their final paycheck up to 72 hours after quitting.

In Colorado, employers are generally required to pay fired workers immediately. However, if the payroll department wasn’t open at the time of the termination, the check can be issued up to six hours after the next business day starts. And when payroll is administered offsite, employers have 24 hours from the start of the next business day to deliver the check. Colorado workers who resign may be paid on the next payday. 

Some states, such as Delaware and Maryland, don’t apply different rules for voluntary and involuntary terminations. They simply mandate that a worker receive the last check by the next regularly scheduled payday. 

In the instance that an employee passes away, other rules may apply, notes Aurelio J. Pérez, an attorney with Littler in San Francisco. In Arizona, for example, up to $5,000 may be given to a surviving spouse. The balance goes to the employee’s estate. In California, a maximum of $15,000 may be paid to the surviving spouse without going through probate. 

Is the Worker Offsite?

“Another issue that sometimes arises is how to send the final paycheck if the person is not physically present at the jobsite for whatever reason,” Rice says. 

Be cautious about mailing the check without first communicating with the employee. It is a better practice to inquire as to how he or she wishes to have the check delivered. At a minimum, use a method where shipping can be tracked and delivery can be verified. “Otherwise, an employer can run the risk of late payment penalties under certain state laws,” he says.

What Counts as Wages?

Note that some states count vacation time as earned wages. Employers in California and Montana must pay out any accrued vacation time, for instance, while those in Arizona and Hawaii are only required to do so if that aligns with their company policy.

In Maryland, organizations can opt out if they have a written policy stating that they don’t pay for accrued vacation and they notify new hires about the policy. 

No matter where you live, the law probably doesn’t require companies to provide compensation for unused sick leave that is treated in a separate category of time off. However, employers that lump together vacation and sick leave into a paid-time-off (PTO) program will need to pay out all unused PTO in some states. A payout may be mandated under a collective bargaining agreement, too. 

[SHRM members-only resource: Compliance Resources] 

What Deductions Can Be Made?

It may be tempting to recoup a loan payment or vacation advance by subtracting the balance from a worker’s final paycheck, but don’t take that step unless you’re sure that doing so is in compliance with state law, says Steve Hernández, an attorney with Barnes & Thornburg in Los Angeles. In California, for example, employers aren’t permitted to make any deductions from final wages other than the usual ones for taxes and health care benefits. Other states have prohibitions on deductions from final pay, too. 

HR’s Role

HR leaders need to understand what types of compensation might be owed to departing employees, including commissions, vacation time, bonuses or stock options. If the rules around final pay in your location are complicated—for example, if you have a remote worker from Nevada with withholdings in Pennsylvania—it’s probably a good idea to seek counsel from an attorney.

Lisa Nagele-Piazza, J.D., SHRM-SCP, is senior legal editor for SHRM.

Illustration by Adam Niklewicz for HR Magazine.

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