When an employee leaves your company, the complicated issue of the final paycheck arises. And how your company handles the check depends on state and federal laws, which can make it difficult for businesses operating in more than one state to come up with a uniform nationwide policy.
State laws generally determine the timing of final paychecks based on whether the employee was fired, laid off, or quit. Depending on the state, deadlines for issuing the last check might be the employee’s last day of work, the following business day, three business days, or the next scheduled payday.
What your company includes in the final paycheck can depend on whether you pay the employee an hourly wage or a salary, as well as on your company’s written policies regarding:
- Severance pay;
- Vacation, sick and personal days;
- Commissions; and
- Other pay and benefit arrangements.
It’s important to know the laws because your company could be assessed interest and penalties for non-compliance. In some cases, companies wind up paying legal fees if the employee resorts to legal action.
One complex area in writing final paychecks involves employees who owe money to your company for any number of reasons, including:
- Payroll advances;
- Tuition payments;
- Employee loans;
- Unreturned equipment such as a company cell phone or laptop computer;
- Purchases through payroll deductions; and
- Prepaid leave.
You might be tempted to withhold the amount an employee owes, figuring that’s the only way your company will collect the debt. That could be a mistake.
Withholding money for employee debts also falls under state laws – unless there is a conflict with federal law, which prohibits withholding if it reduces the final payment to below minimum wage. There is an exemption for withholding amounts for debts stemming from payroll advances.
However, there can be a thin line between a payroll advance and a loan. In some cases, courts ruled that advances became loans at some point.
State withholding laws range from extremely restrictive to very liberal. When there is a statute, allowable withholding amounts can depend on the circumstances surrounding the debt and whether you pay the employee a salary or an hourly wage.
Even if the individual receives a salary, if the debt stems from loans, prepaid leave, or unreturned equipment, it can be unclear whether an employee was actually salaried and exempt from overtime.
One common misconception is that a company can withhold amounts owed from the final paycheck if an employee signed a blanket authorization. But withholding authorizations must generally be voluntary and free from coercion. If your company, like many others, has all new hires sign blanket authorizations about policies, they can be interpreted as a requirement of employment and thus not voluntary.
One consideration is to ask an employee to sign a withholding authorization for a specific debt at the time the employee incurs it. That form should include a statement that the employee can revoke the authorization any time with two weeks prior notice. (See box below for a New Hampshire case involving blanket authorizations.)
Caution: When it comes to final paychecks, the laws are complex. Consult with a professional who is knowledgeable about payroll laws, and state and federal labor department regulations.