Managing termination pay: Beware trouble ahead

August 21, 2013

employee terminationWhat goes into a final paycheck, and when that check must be given to a terminating employee, is strictly a state issue, said Hope Williams, CPP, the American Payroll Association’s director of training, and James Paille, CPP, director of operations at Thomson Reuters.

Williams and Paille helped attendees at the APA’s annual Congress understand termination pay.

I quit! Voluntary terminations

Companies usually handle final pay for involuntary terminations just fine. They’re not so good with voluntary terminations, said Paille.

One way to make things easier, Williams said, is to ensure that the company has a standard policy. She suggested implementing a workflow by gathering documentation and knowing your final pay time line. First-level managers don’t want to complete employees’ termination paperwork, she pointed out. Make them do it anyway.

You can usually take all the regular deductions from a final check, but there’s more to consider. It’s important to understand company policy on paying commissions and draws against commissions; state laws on paying accrued vacation, bonuses and PTO time; and how to handle employees who terminate with negative PTO balances, Williams noted.

General rule: Don’t hold a final check hostage until the employee returns company property, she warned, because you can’t hold what state law requires you to pay. But you can check state law to see whether you can hold the final check.

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You’re fired! Involuntary terminations

A hand­­ful of states require employees to be paid im­­me­­diately. Best practice: According to Paille, if you have offices in several states, apply the most stringent state law—in many cases, paying immediately—to all the states in which you do business. Best advice: If it looks like there’s any wiggle room, be conservative. For example, in Illinois, employees must be paid by the next regular payday if it’s not possible to pay immediately. The issue, Paille said, is who determines whether it’s not possible to pay immediately. You don’t want the state to second-guess you.

Some companies use paper checks for the last payment, because checks are easier to cancel than direct deposit, Williams said. Unloaded paycards can serve as an alternative to checks, but be sure state law allows it, she cautioned. Whatever you do, don’t agree with the employee to pay at the next regular payday, she warned, because employees can’t sign their rights away.


The bottom line, according to Williams, is to never pay termination pay on the fly. She then gave some termination pay troubleshooting tips:

  • Compare company policy to state law by cre­­at­­ing a spreadsheet of company policy and state laws. For involuntary terminations, you can’t have one policy across the board unless you’re paying immediately, Williams reiterated.
  • Ensure that the Payroll department is noti­­fied. Ideally, Payroll should be informed when a termination happens, but that’s not always the case, Williams lamented. She sug­­gested that you routinely flag words in all emails by filtering on the word “termination.” How­­ever, you may need help from your HR and IT departments to do that.
  • Have a noncompliance strategy. For in­­vol­­un­­tary terminations, if you can’t comply with state law, suspend the employee with pay until you can collect the data you’ll need to cut the final check (e.g., the employee’s accrued vacation balance). Williams also suggested that you develop a termination checklist. That will help with your due diligence, should a state labor department come knocking, she said.

GET THAT SPREADSHEET STARTED: To help you along, access this State-by-State Chart on Final-Pay Laws. Delaware, Indiana, Iowa, Kansas, Maryland, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Virginia and Washington are omitted because employees in those states must receive their final pay at the next regular payday, regardless of whether they quit or were fired.

Some states, like Massachusetts, have special rules for paying employees who work in manufacturing. As always, to get the full story on final pay, you should consult your state labor department.

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