Originally published through SHRM 3/21/2008
When it comes to a terminated employee’s final paycheck, you as an employer must keep two things in mind: 1) When must the check be paid and 2) what must be included in the paycheck. These issues are governed by state law, as there are no federal laws immediately on point.
Although the considerations are applicable whether the employee voluntarily or involuntarily separates from the business, the manner of separation might give rise to particular distinctions.
When must the check be paid?
Many states have wage payment statutes that require employers to issue an employee’s last paycheck by the next regular payday. Other states require that, if possible, the employee should be paid at the time of termination and at the latest by the next regular payday. Still, others require employers to issue the paycheck immediately.
Some states base their wage-payment requirements on whether the termination was voluntary or involuntary. By way of example, California requires immediate payment of wages upon involuntary or voluntary termination, if the employee gave the employer 72 hours notice. On the other hand, California employers have 72 hours to issue payment if the termination was voluntary without notice.
It is important that you familiarize yourself with your applicable state laws. As a general rule, however, if the employee’s final workday is known, it is a good idea to issue the final paycheck on his or her last day. If the final day is not known, then you should issue the final paycheck as soon as possible, but no later than the next regular payday.
What must be included in the check?
All earned “wages” must be included in the final paycheck. Most obviously, wages include all time worked. However, depending on the state and employer, wages could also include unused, accrued vacation time. Here again, state statutes vary considerably.
Some states, such as California, Illinois, and Maryland, require employers to pay out accrued, unused vacation time as wages and do not allow employers to adopt policies restricting such payments.
Other states, however, do allow employers to adopt policies that restrict vacation payments even though these states classify accrued vacation time as “wages.” Iowa and Kentucky are examples of such states.
A third group of states do not even classify accrued vacation time as “wages.” These states, however, allow employees to collect this vacation time if their employer has paid it out in the past or if the employer’s policies expressly grant such payments. Such states include Florida, Kansas, Missouri, Ohio, and Pennsylvania.
Unlike the timeliness of wage payments, there is no safe, general rule for an employer to follow when it comes to paying out on accrued vacation time. Contact your state department of labor to obtain information about your state’s requirements.