Issuing Final Payments to Departing Employees

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Many tasks must be handled properly when employment ends, especially the last paycheck.

​HR professionals must execute many tasks when employees leave the company by choice or are terminated. One of the most important items to get right is final payments to departing employees.

Be Big in Small Things

Some companies dock final paychecks for excess sick days, uniform violations or other inexpensive missing property. The late Malcolm Maclean, former mayor of Savannah and accomplished attorney, advised his clients and colleagues, “Be big in small things.” A company is best served if it avoids a penny-wise and pound-foolish reckoning with the departing employee.

When an employee leaves, the process should be as amicable as possible under the circumstances, and always professional. Good employees should depart on a positive note, since former workers serve as ambassadors for your organization and your brand. Satisfied “alumni” will continue to be friends with and referral sources for their ex-employers.

Even when an involuntary departure is triggered by a rule violation or performance problem, err on the side of graciousness and generosity. The goal is to minimize the risk of legal liability, not to provide the departing individual with another reason to file an administrative claim or lawsuit.

Federal Law Governing Final Payments

The last paycheck should include compensation for all time worked. Best practices discourage extraordinary deductions from final paychecks, while the Fair Labor Standards Act (FLSA) prohibits such deductions from overtime pay. Additionally, nonexempt employees must be paid at least minimum wage for all regular hours worked.

Exempt employees’ final paycheck should not reflect extra deductions for discipline or property violations. If an employee’s last week is less than a full workweek, however, the FLSA allows organizations to prorate the final paycheck and cover only days worked.

Whether an employee is exempt or nonexempt, the FLSA does not require employers to immediately issue the final paycheck; rather, they may wait until the next regular payroll.

Importance of State Law

Usually, federal law pre-empts state law. Even so, with wage-hour law, when state law is more generous to employees, as a general rule, state law governs. Thus, some states require immediate payment. In California—one of the strictest states in the nation when it comes to final-payment rules—final checks must be given upon termination or within 72 hours if the worker resigned. If an employee has given more than 72 hours’ notice, the check must be presented on the last day of employment.

By contrast, employer-friendly states such as Georgia, Florida, Alabama and Mississippi have no laws regulating final payments when an individual is dismissed or quits. Accordingly, businesses in these states may wait until the next regular payroll after an employee’s separation to issue the final paycheck.

Violating state laws on final payments, even out of ignorance, can be costly for employers. In some states, if an employer fails to pay a departing worker within the legal time requirements, it may have to pay additional penalties and interest, along with any attorney fees and legal costs the employee incurred in seeking payment.

Vacation Time and Sick Pay

The FLSA does not determine whether unused vacation time or sick leave should be included in the final paycheck. Once again, state law governs.

In some states, including California, accrued paid time off is considered part of earned compensation and must be included in a last payment. In other states, such as Georgia, company policy governs.

In states where an employer is able to set its own rules, an employee handbook is an ideal place to specify whether unused vacation time or sick pay is earned and payable to exiting employees. Legalistic distinctions based on “for cause” terminations are ill-advised. Remember: The goal is to have the employee exit as gracefully as possible, not to create more causes for controversy.

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