Most employers with handbooks or comprehensive policies have at least some kind of reminder to employees that looks like this:
It is the employee’s responsibility to keep their employment records up to date, including home address, telephone number, dependents and spouse information and emergency contact information. Employees must promptly advise Human Resources with any change to their employment records.
There are many obvious good reasons to remind employees to keep their employment records up to date, but as we wind up another calendar year and employers begin closing out the books and cleaning up uncleared checks, I want to remind you of another one: unclaimed or uncashed wages.
As you know, the federal Fair Labor Standards Act (FLSA) requires employers to pay final compensation to their employees, though it is silent on exactly when employers must do so. Many states, like Illinois and Indiana, have filled in the gap and specify exactly when and how employers must pay any final compensation after employment ends (whether temporarily or permanently). However, as you audit and reconcile year-end balances, you might find that some of your checks have gone uncashed, or perhaps an employee failed to heed your advice about keeping employment records up to date and you have been unable to deliver final compensation. The “finders keepers, losers weepers” rule does not apply in wage and hour law like it might have on the playground, though. When an employee never comes to pick up a final check, does not dispose of stock, or fails to cash a check before it expires, employers cannot treat this unclaimed property as found money.
Wage and Hour Law meets State Unclaimed Property Law
The common law principle governing unclaimed property is called “escheat.” Under English common law, it was a rule that returned (surrendered) property to a lord or to the Crown if no lawful heir could inherit it. Under U.S. law, unclaimed property laws are primarily a state issue and apply to everything from refunds of deposits paid to utility companies to bank balances to wages, stocks, bonds, cash or other employee property that your business holds. After a specific statutory period, the property reverts to the state; property holders (like employers) cannot simply keep it for themselves. The laws are intended to give the rightful owners of property an opportunity to claim it without having to track it down through corporate mergers, relocations, and bank account changes. Instead, individuals seeking unclaimed property can go to their home state (current or former) to locate and claim it.
If you reconcile accounts at the end of the year and find unclaimed (and even expired) paychecks or other employees wages or property, your state law likely requires you to hold that property for a certain period of time and them remit it to the state where the person last worked or lived. Most unclaimed property statutes also provide for fines or penalties if you fail to return the property to the state after failing to find the rightful owner.
Returning Employee Funds to the State
Before you do anything with unclaimed wages or property, first check your state’s laws to see how long you must hold the property, what you must do to locate the owner, when you must report the property to the state, and where you must send it. In some states, like Indiana and Illinois, you will send the property to a division of the attorney general’s office. In other states, the treasurer’s office or another agency will hold it. Speaking generally, most states require employers to hold property for either 3, 5, or 7 years. Indiana’s statute requires three years of dormancy, while Illinois requires five. In most cases, property of any type that goes unclaimed for this period is eligible for reporting and remission to the state. However, not all property is treated the same under these laws depending on what it is. For example, both Indiana and Illinois requires businesses to report and remit payroll checks after just one year of dormancy, which is relatively common among state unclaimed property statutes.
Second, once you locate unclaimed property, you cannot simply return it to the state without making your own efforts to locate the former employee. All of the state unclaimed property statutes that I have read require employers to take affirmative, good faith efforts to locate the former employee. Employers will need to demonstrate that they have taken steps like sending a tracked mailing (certified letter, UPS or FedEx package, etc.) to the last known address or otherwise attempted to reach the employee through last known contact information. A majority of statutes require you to wait six months or more after making these attempted notifications. Once you have complied with the statutory requirements, and can demonstrate that in your filing to the state, you can then return the funds to the state.
Third, States also have different reporting deadlines during the year. Some use a date early in the following year after the dormancy requirement is met. Others, like Indiana and Illinois have more accelerated deadlines (November 1 in both cases), meaning that you may need to do a little advance planning to avoid missing deadlines.
Finally, state unclaimed property laws also have detailed requirements for remitting funds and required documentation. Many also require employers to follow up periodically after remitting funds to the state.
Upshot for Employers
State minimum wage laws can have statutes of limitation (10 years in Illinois, and 2 years in Indiana, for example) that extend beyond the deadline for remitting unclaimed funds to the state. By following the requirements of unclaimed property laws remitting unclaimed wages to the state as required, employers can help guard against wage claims from former employees who do not realize that you were unable to deliver the final wages to them. Pointing them to the state’s unclaimed property agency can quickly and inexpensively defuse a wage and hour lawsuit.