Paying Final Wages to Departing Employees

Happy New Year! I hope that 2020 is off to a good start for you! For me, this is the time of the year to (among other things) start finalizing succession planning and updating our pipeline of directors, executives, and managers. It isn’t just convenient timing; January through March also marks the busiest time of year for transitions, particularly for executives. Be it retirements, resignations, transfers, or departures, one issue that employers frequently struggle with is how to handle paying final wages to departing employees while staying on the right side of wage and hour laws.

Final paychecks are a minefield for employers if for no other reason than the variety of different state laws that can apply to the range of situations. Here are just a few:

Not surprisingly to readers of this blog, California has enough final pay quirks that it would merit its own post. Some states even have different statutes or regulations that apply to special pay types like commissions and bonuses. Do you have employees in multiple states? Because these laws are intended to protect workers, you will typically need to apply the law most advantageous to the worker. For a Delaware corporation headquartered in Ohio with employees in Montana, that could mean applying any of those three laws, not just the one where the employee is located or where your headquarters happens to be. Even though these questions can be state- and employee-situation specific, let’s tackle a few of the common questions.

Paying unused vacation/paid time off

It depends. The federal fair labor standards act (FLSA) is silent on this issue, but the applicable state may not be. This is a topic I will cover in a future post. Stated generally categorize payments for unused vacation/PTO in one of three ways:

1. Employers must pay employees for accrued, unused vacation time along with final pay;
2. Employers may exclude accrued, unused vacation time from final pay only if they have a written policy that explicitly states that this is the employer’s practice; or
3. Employers may exclude accrued, unused vacation from final pay absent a policy that says otherwise.

If your company maintains separate vacation (can be taken for any reason) and sick leave (restricted use) banks, most state sick leave laws do not require employers to pay employees for accrued, unused sick leave at termination. However, if you bundle all leave, including sick leave, into a single leave bank, then states likely require you to treat the leave as an undifferentiated leave bank at termination.

Handling Unreturned Property

One of the most frequent questions that I have received in this area relates to recapturing the cost of lost or unreturned property like keys, computers, phones, and other items issued to employees. In some cases, the property includes intangibles like copies of electronic data, balances due on employee purchases, loans, or overpayments. Hopefully, you remember to recover tangible items in your separation meeting with the employee, but sometimes that is difficult with remote employees, ones who abandon their positions, or situations where the property is intangible. As a general rule, no, you cannot withhold final pay because an employee has failed to return your property. You must meet the applicable final pay deadline anyway.

That leads to the next question: what about deductions? Here, the answer is more mixed. The FLSA does not permit deductions for lost, stolen, or unreturned equipment from the final pay of exempt employees. For non-exempt employees, though, the FLSA permits employers to make these deductions provided they do not reduce the employee’s pay below the minimum wage or result in employee’s receiving less than the full overtime premium for hours worked. However, even the FLSA (like most states) generally requires employees to obtain an employee’s written consent before making a permissible deduction.

Even if the FLSA permits a deduction, and even if the employee signs a written consent for it, many states still prohibit these deductions regardless of employee classification or consent. Others, like Illinois, have an additional process or requirement that you must follow before you can make an allowable deduction. Check state and local laws, of course, but first ask yourself whether the deduction is worth the trouble. Just as when existing employees lose or damage equipment, some of these situations are better chalked up to “the cost of doing business.” Trying to chase down small-dollar deductions costs more in time and goodwill than it is often worth.

Paying Exempt Employees

Calculating the amount owed to hourly, non-exempt employees is pretty easy: you simply pay them for the hours they worked before termination. For exempt employees, the calculation is similarly simple, but does run a bit counter to the normal rule of paying an exempt employee for weeks where they work even one day.

To give you an example, assume that an exempt employee who works a typical Sunday-Saturday workweek resigns and works their last day on Wednesday. Normally, the FLSA requires employers to pay exempt employees their full salary for any workweek in which they perform work. However, end of employment situations are different. If an exempt employee doesn’t work a full workweek in their first or last week on the job, then you may prorate that employee’s salary for that workweek so that it only covers the days worked. In our example, the exempt employee would be paid for 4 days of their salary, not the whole week.

Takeaways

Like so much in wage and hour law, your employee’s location and your company’s location can dictate how final pay decisions and timing work out. State laws vary widely based on each factual situation, so check with counsel before proceeding.