When it’s time for the company and an employee to part ways, whether voluntary or involuntarily, it’s always helpful to have a set best practice. One of the most important things you’ll do as an employer is to ensure that departing employees are being paid the correct amount and in a timely manner.
Considerations
There are a few different types of employees and rules to consider when issuing a final paycheck, such as whether the employee is paid hourly or salary, and whether they are exempt or non-exempt. An hourly employee is paid a set wage per hour, and a salary employee is paid a set wage per pay period. Additionally, an exempt employee (generally classified as salary) is exempt, or excused from being paid overtime wages. A non-exempt employee is not exempt from the FLSA overtime rules and must be paid 1.5 times their hourly rate when they work over 40 hours in a week.
Regardless of employee type, the last paycheck should include compensation for all time worked. Additionally, the FLSA does not allow deductions to take an employee’s pay below minimum wage, unless that deduction is for the employee’s benefit, such as an insurance premium contribution. Exempt employees’ final paycheck should not reflect extra deductions for discipline or property violations. If an employee’s last week is less than a full workweek, however, the FLSA allows organizations to prorate the final paycheck and cover only days worked.
Whether an employee is exempt or nonexempt, the FLSA does not require employers to immediately issue the final paycheck; rather, they may wait until the next regular payroll. Though there are some states whose wage-hour laws overrule the FLSA guidelines. States such as California and Colorado require immediate payment. Final checks must be given upon termination or within 72 hours if the worker resigned. If an employee has given more than 72 hours’ notice, the check must be presented on the last day of employment. A major regulation to consider as employers are hiring more and more remote employees. Additional information can be found on the Dept of Labor/FLSA’s website at Last Paycheck | U.S. Department of Labor (dol.gov).
The FLSA does not determine whether unused vacation time or sick leave should be included in the final paycheck. Once again, state law governs. In states where an employer is able to set its own rules – such as Indiana, an employee handbook is an ideal place to specify whether unused vacation time or sick pay is earned and payable to exiting employees.
Before calculating the exact amount of final pay an employee is owed, you’ll want to first consider the following:
- Is the employee hourly or salary?
- Is the employee exempt or nonexempt?
- What is the company’s process for paying out accrued but untaken leave?
- What deductions should be taken from pay?
Additional things to consider:
- All standard taxes (state, federal, etc.) must be deducted from the last check.
- All earned compensation for time worked must be paid out.
- An employer cannot withhold a terminated employee’s paycheck until equipment is returned.
Deductions
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, 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
- Amount of loan made to the employee by the employer
- See DOL: Wage & Hour FAQs (in.gov) for additional category information
Under the Fair Labor Standards Act (FLSA), a company may make deductions from an exempt employee’s salary for the employee’s initial or terminal week of employment if the employee does not work the full week. In determining the amount of the daily salary to be deducted for absences of a full day or more, the calculation must be based on the usual number of workdays scheduled to be worked by the exempt employee in a workweek, divided into the pro rata monthly salary attributable to a week.
The method used and steps for calculating their pay is outlined below:
- The pre-determined monthly salary is multiplied by 12 to find the yearly salary.
- The product of that multiplication is divided by 52 (the number of weeks in a year) to find the weekly salary.
- The usual number of days (regardless of the number of hours usually worked in any workday) the employee is scheduled to work in a workweek is divided into the weekly salary.
Real-life Example
In this scenario, John is paid on a semi-monthly basis. John’s annual salary is $60,000.00. He is paid on a semi-monthly basis at a rate of $2,500.00 per pay period ($60,000.00 / 24 pay periods per year). This is a weekly rate of $1,153.85 ($60,000.00 / 52 weeks) and the daily rate is $230.77 ($1,153.85 / 5 days).
The final pay period encompasses August 1, 2012 – August 15, 2012. John’s last day is August 10th. John would be paid for 8 days of work, as he is not required to be paid after the date of termination. John’s final wages would be $1,846.15 ($230.77 x 8 days).
Calculating an hourly employee’s final check is much simpler. Employers will multiply the employees hourly wage with hours worked to get their final owed wages prior to taxes and deductions.
AccuPay Can Help
When using payroll or HCM software, like AccuPay’s isolved People Cloud, the calculations above can be handled seamlessly, all in one place. isolved’s Offboarding feature will do a full calculation of any final wages as well as factoring in any benefit end dates, leave accruals, garnishments and taxes so that maintaining final checks is a breeze. Reach out to a member of the AccuPay team at payroll@accupay.com with questions and for more information.
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.