When an employee leaves your company, you have a responsibility to ensure that he or she receives their final pay in accordance with federal and state law. Generally, these laws dictate when you must provide the employee with their final pay and what the pay must include. Here we provide answers to frequently asked questions about final pay.
Q: When is final pay due?
A: Under federal law, final pay is generally due by the next regular payday, but many states require final pay sooner. In some cases, this time frame differs depending on whether the employee initiates separation (voluntary termination) or the employer initiates separation (involuntary termination). For example, California requires final pay immediately for involuntary terminations. For voluntary terminations, the state requires final pay within 72 hours. However, if the employee provides at least 72 hours of notice, final pay is due on the employee's last day. Note: Some states have separate final pay deadlines and other rules for commissions, bonuses, and other special situations.
Q: Do I have to pay employees for unused vacation when they leave?
A: It depends on your state and company policy. States generally handle unused vacation and paid time off in one of three ways:
- Employers must pay employees for accrued, unused vacation time at the time of separation;
- Employers can exclude unused vacation time from final pay only if they have a written policy that explicitly states that employees will not be paid for any accrued, unused time upon separation; or
- Employers can exclude accrued, unused vacation from final pay absent a policy that says otherwise.
Q: Do I have to pay employees for unused sick leave at the time of termination?
A: Most sick leave laws don't require employers to pay employees for accrued, unused sick leave at the time of separation. However, if you bundle all leave, including sick leave, into a single paid-time-off (PTO) policy, your state may apply the same rules as it does for accrued, unused vacation/PTO (which could require payout upon separation). Check your state law to ensure compliance.
Q: An employee quit and has failed to return a company computer. Can I withhold his final paycheck until he returns it?
A: As a general rule, you may not withhold final pay until an employee returns company equipment. You must meet the applicable final pay deadline even if the employee hasn't returned company property.
Q: Instead of withholding the entire paycheck, can I make a deduction from the employee's final check to help pay for unreturned equipment?
A: The federal Fair Standards Labor Act (FLSA) does not permit this type of deduction from exempt employees' pay. For non-exempt employees (those entitled to the minimum wage and overtime), the FLSA permits employers to make deductions from employees' pay for lost/stolen/unreturned equipment provided it does not reduce the employee's pay below the minimum wage and does not cut into any overtime pay. Some states prohibit this practice or have additional requirements, so check your state law before making a deduction.
Note: 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. company uniforms, equipment, or employee theft) and how the amount of the deduction will be determined. It is a best practice to obtain the employee's authorization in writing and consult legal counsel before making a deduction.
Q: An exempt employee who typically works Monday through Friday resigned. Her last day is Wednesday. Do I have to pay her full salary for that final week even though she will only work part of it?
A: Apart from a few narrow exceptions, the FLSA requires employers to pay exempt employees their full salary for any workweek in which they perform work. However, if an exempt employee doesn't work a full workweek in their first or last week on the job, you may prorate the employee's salary for that workweek so that it only covers the days worked.
Failure to provide final pay in accordance with applicable laws may result in fines. Develop policies and procedures to ensure compliance.