It’s always best to understand what needs to be done prior to terminating an employee, especially if they are working in a different state than where the business resides. The general rule on a Federal level, is to pay an employee on their next scheduled payday. However, there are some states with varying requirements that must be considered.
Final paycheck rules will apply regardless of whether an employee was terminated voluntarily or involuntarily. Most state rules do not cover contracts, collective bargaining agreements, public employers, exceptions, or rules for specific circumstances (e.g., mergers), industries, or professions (e.g., commissioned sales reps). If a state law doesn’t specify a deadline for providing an employee’s final paycheck, the employee is usually entitled to be paid no later than what would have been their next regular payday.
Indiana for example, takes the approach of paying the terminated employee on their next scheduled payday – regardless of whether they resigned or were terminated involuntarily. Other states are much stricter in their final paycheck rules. Oregon will pay an involuntary termination by the next business day, but if the employee gives less than 48 hours’ notice, they are to be paid within 5 days or the next regular payday – whichever is sooner. California is one of the strictest, with involuntary terminated employees to be paid immediately, and resignations to be paid within 72 hours.
As you can see, there is a lot to think about! Employers must be aware of any termination rules when they have employees in other states, as the lived-in state determines the rule, not their worked-in state.
DEDUCTIONS – WHAT IS ALLOWED?
There are guidelines as well regarding what an employer can deduct from a terminated employee’s last paycheck. Similar to the timeline in paying out their last check, some states have different rules on what is allowed to be deducted.
Employers are always allowed to take the mandatory deductions for taxes – Social Security, garnishments, and voluntary deductions such as health insurance or retirement plan contributions. Some employers may wish to deduct an amount owed for unreturned company property – but that is not allowed. An employer must pay out all earned wages, regardless of the status of unreturned property.
In the state of Indiana, deductions such as uniforms can only be taken when there is a written policy in place for that deduction and signed by the employee. Below is the Indiana-specific policy for final check deductions according to the Indiana Department of Labor’s Knowledge Base.
“An employer cannot deduct wages from an employee’s paycheck or fine an employee for cash shortages, required uniforms, required tools, items necessary for employment or breakage, damage, or loss of the employer’s property. Indiana law requires three conditions to be met in order for a wage deduction to be valid: –The agreement for the deduction must be in writing, signed by the employee, by its terms revocable at any time by the employee upon written notice, and agreed to in writing by the employer. –A copy of the deduction agreement must be delivered to the employer within ten days of its execution. Only certain categories of deductions are allowed, including: –premiums on an insurance policy obtained for the employee by the employer; –contributions to a charitable organization; –purchase price of bonds, securities or stock of the employing company; –labor union dues; –purchase price of merchandise sold by the employer to the employee; –amount of loan made to the employee by the employer; –contributions of the employee to a hospital service or medical expense plan; –and payment to an employee’s direct deposit account. An employer cannot deduct more than twenty-five percent (25%) of the employee’s disposable earnings for a week or the amount by which the employee’s disposable earnings for that week exceed thirty (30) times the federal minimum hourly wage rate.”
Other states such as New Jersey, require that employees cannot be payroll deducted for a uniform that displays the company logo. In this case, the cost of uniforms is considered a business expense, which must be borne by the employer. In the state of California, employees cannot be deducted for the cost of uniforms at any time, as well as being charged for normal wear and tear.
Other prohibited deductions include pre-employment physicals when they are a condition of employment, or any other job-required testing the employer deems necessary.
TIME OFF
The payout of accrued yet unused time off is another factor that is mainly regulated at the state level. There is no Federal requirement in the United States for employers to offer time off – (sometimes referred to as PTO, Vacation, Sick Time), or any other form of paid time off. Thus, for employers that do choose to offer paid time off, the guidelines for payout are regulated by each state. This can get even deeper as some employers may choose to have multiple policies with different accrual plans for each time off type – such as offering both Sick and Vacation time.
In the state of Indiana, the general rule is – employers must abide by their written policy on whether they will pay out accrued time off. Employers in Indiana are able to choose whether or not they will pay out the time off balances upon termination.
Other states, however, take many different approaches to paying out time off on the final paycheck. Louisiana requires employers to pay out any accrued and unused vacation time at the time of separation, regardless of the reason for termination. Montana views PTO and Vacation differently when terminating an employee. Vacation must be paid out upon termination, but PTO balances are subject to the employer’s specific policy.
OTHER CONSIDERATIONS
- Consider if there is an employment contract, and whether any bonuses, etc. are to be paid out.
- Will the company give severance? This is not regulated Federally, but some states have specific rules if severance is offered.
- Post-termination checklist
- Contact IT – ensure all access has been turned off
- Cancel any company credit cards in the employee’s name
- Contact insurance carriers of the termination. Notify COBRA administrator
- Update HRIS/payroll systems
Prior to terminating an employee, be sure to familiarize yourself with any state specific termination rules you may need to consider. If you have further questions, please contact Jessica Wiegmann, MLD, SHRM-CP, at AccuPay, jessica@accupay.com, 317-885-7600.
Thanks to AccuPay’s Jessica Wiegmann, MLD, SHRM-CP for writing this post.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.