Final pay – what must be included?
01 July 2020
Andy Garboden CPP, director of payroll training for the American Payroll Association, provides details
Although US state laws differ on when and what must be paid to an employee whose employment is terminated, some specifics are required regardless of the state laws and are governed by the Fair Labor Standards Act (FLSA).
According to the FLSA, final pay is generally due by the next regular payday. An employee must be paid for all earned and unpaid wages from the end of the previous pay period until the last day worked. For a nonexempt employee, the final pay consists of the hours worked, multiplied by the rate of pay, plus any additional pay such as nondiscretionary bonuses and differentials. For an exempt employee, the final pay can be prorated based on the days or hours actually worked since the last pay period. Although there is no requirement under the FLSA to pay unused vacation, this is generally a state-specific area. Any promise for severance pay must also be honoured.
Final pay is subject to mandatory withholding, such as federal income tax, social security, Medicare tax, state- or local-mandated taxes, and any applicable wage garnishments such as child support, tax levies, and creditor garnishments. Voluntary deductions, such as medical and dental benefits, may be withheld, depending on company policy.
Generally, you must meet the applicable final pay deadline even if the employee has not returned company property. 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., uniforms, equipment, or retribution for employee theft) and how the deduction amount will be determined.
Final pay cannot be held because an employee fails to sign a timesheet or does not attend an exit interview. Typically, the final wages can be paid by any method used on other paydays. However, you may consider creating a company policy for consistency.
What does state law dictate?
The APA’s Guide to State Payroll Laws (https://bit.ly/2VxUgBd), which is available as a standalone publication and as part of Payroll Source Plus (https://bit.ly/3i9mQCy) has a great table (2.5) titled ‘Paying terminated employees’ that shows the state requirements regarding payment of wages upon termination of employment. State rules govern how soon employees must be paid when they separate from employment, either through discharge, layoff, or resignation, including various requirements for temporarily laid-off, suspended, or striking employees.
The rules governing whether employers must pay separating employees for unused accrued vacation time are also provided. While some states have specific vacation pay rules, many leave the determination up to employment contract or employer policy; others include vacation pay in the general definition of wages.
This table also shows which employers are subject to or excluded from the state’s law (e.g. all employers, private employers, and farming or manufacturing employers), and it includes provisions applicable to specific industries or groups. In addition, civil and criminal penalties are provided as well as the source of the information.
Involuntary v voluntary terminations
Four states (Alabama, Florida, Georgia, and Mississippi) do not have a provision for involuntary terminations. Six states (Alabama, Arkansas, Florida, Georgia, Mississippi, and Missouri) and Puerto Rico do not have a provision for voluntary terminations. For these states, follow either the FLSA (the next regular payday) or company policy.
The remaining states vary from immediately to the next regular payday. They also vary depending on whether the termination was voluntary (some with notice requirements) or involuntary.
Employers in Alaska, California, Hawaii, Idaho, Minnesota, New Hampshire, Oregon, and West Virginia should be careful. If an employee provides written notice of a voluntary termination, the timeline of when the final pay is due is shortened. Payroll should work closely with the human resources team to ensure the department knows if the employee gave written notice.
For involuntary terminations, most payroll professionals think California is the strictest state in the union, when in fact ten states (California, Colorado, Hawaii, Illinois, Massachusetts, Michigan, Minnesota, Missouri, Montana, and Nevada) have regulations that indicate the employees must be paid immediately or on the day of termination. Another seven (Alaska, Washington DC, New Hampshire, New Mexico, South Carolina, Utah, Vermont) are within two to five days. Three (Arizona, AX, and Texas) are within six to seven days, with the remaining ranging from ten days to the next regular pay day.
As previously mentioned, for voluntary terminations, they range from immediately (usually with notice) to the next regular payday.
Generally, employers that provide accrued time off will need to pay it out. Look at state law where the employee is working and/or company policy.
There are 22 states (Alabama, Alaska, Arkansas, Washington DC, Florida, Georgia, Idaho, Indiana, Kansas, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Pennsylvania, South Dakota, Utah, Virginia, Washington, West Virginia) with no provision for paying accrued vacation. However, many of these states have a broad definition of wages that may include accrued vacation. There are 26 states (Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Iowa, Illinois, Kentucky, Louisiana, Massachusetts, Maine, Michigan, Minnesota, Montana, North Carolina, New England, New Hampshire, New York, Oregon, South Carolina, Texas, Tennessee, Vermont, Wisconsin, Wyoming) that refer to company policy or union contracts or just make it mandatory. Finally, if you are in Maryland, Puerto Rico, or Rhode Island, look at the rules closely as they are very different than most of the others. Verify the state that employees are working in and ensure company policy speaks to paying accrued vacation to terminating employees.
It is important to know the state laws where employees work. The laws that dictate final payment are always determined by the state the employee works in, not necessarily the laws of residence or incorporation.
Additionally, penalties are dictated by the state the employee works in, not necessarily the resident state or state of incorporation.
Six states (Alabama, Florida, Georgia, Illinois, Mississippi, Ohio) have no provision for penalties. There are nineteen states (Alaska, Colorado, Connecticut, District of Columbia, Hawaii, Hawaii, Maryland, Massachusetts, Michigan, Montana, Nevada, New York, Oklahoma, Rhode Island, Tennessee, Utah, Vermont, Washington, Wyoming) with a penalty that includes a criminal charge and/or jail time. These are pointed out to show that some states take final wage payments very seriously. Most states simply either have a penalty that must be paid to the employee for failure to pay timely or a civil penalty collected by the state.
Note that some states have specific laws for employees who quit and were responsible for the employer’s money or property. These provisions may allow a longer time to pay final wages.
Most states have laws specifying the types of voluntary deductions that employers may and may not make. Company policy may need to clarify under which conditions voluntary deductions are taken from final wages.
There are specific regulations under section 125 cafeteria plans as to the acceleration of certain deductions, such as flexible spending accounts.
Ask what the company policy is and to see it. A little preparation will save an employer time and money.
Featured in the July/August 2020 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.