Final Paychecks: What Employers Need to Include and Consider

When an employee leaves a company, whether due to resignation, termination, or retirement, employers are legally and ethically obligated to issue a final paycheck. This paycheck must include all compensation owed and meet specific federal and state requirements. Failing to comply can lead to penalties, employee claims, or legal disputes. Here’s a look at what should be included in a final paycheck and the key considerations for employers.

What Must Be Included in a Final Paycheck:

• Regular Wages Earned – The final paycheck must include all regular wages earned up to the employee’s last day of work. This includes pay for all hours worked that have not yet been compensated.
• Overtime Pay – If the employee is non-exempt under the Fair Labor Standards Act (FLSA), any earned overtime must be calculated and included.

What May Need to Be Included in a Final Paycheck:

• Accrued but Unused Paid Time Off (PTO) – Some states, like California, require that accrued but unused vacation time (whether stand-alone or as part of a PTO policy) must be paid out. Other states, like New York, only require that vacation be paid out if the employer’s policy doesn’t say that it will not be paid out.  Check your policies and consult with an attorney or HR advisor to see if you are required to pay this out.
• Bonuses and Commissions – If the employee has earned bonuses or commissions under the terms of an employment agreement, incentive plan, or sales contract, these may need to be included. The timing and calculation will vary based on the bonus or commission plan and applicable laws.
• Reimbursements – Reimbursements for business-related expenses incurred by the employee should be paid consistent with company policy if the employee has submitted the appropriate documentation.
• Severance Pay (if applicable) – While not legally required unless stipulated in a contract or collective bargaining agreement, severance payments may, if applicable, be included in the final check.  Note that some states consider severance payments to be an offset to the employee’s unemployment compensation.  In New York, if such payments are made more than 30 days after the last day of work the State will not offset those payments, so some employers provide severance 31 days or later after separation.
• Provide a Pay Stub – Include a detailed pay stub or itemized breakdown to show how final compensation was calculated.

Timing Requirements

Timing for issuing the final paycheck varies by state. Employers should familiarize themselves with state-specific rules to avoid penalties.  In New York, for example, final wages must be paid by the next regularly scheduled payday.  In California, payment must be made on the day the employee is separated unless the employer did not know it would be terminating the employee (for example if an employee is caught stealing or quits without notice), in which case a final paycheck is due within 72 hours of separation.  Penalties for failure to timely pay final wages can be significant under some states law, so employers should make sure they are prepared before terminating an employee.

Deductions from Final Paychecks

Employers can generally make the same lawful deductions from a final paycheck as from regular paychecks (e.g., for taxes, garnishments). However, certain deductions—like those for unreturned equipment or training costs—are subject to state law and may require written authorization from the employee.  Employers should also review the terms of employee benefit plans to determine whether benefit payment deductions should be included in the final paycheck.

Best Practices for Employers

• Conduct a Final Paycheck Review – Ensure all compensation due to the employee is calculated correctly.
• Review State Laws – Final paycheck laws can change, so it’s essential to stay informed and adjust company policies, accordingly, including reviewing legal requirements when issuing final paychecks.

Conclusion

Final paychecks are more than just a routine payroll transaction—they are a critical part of ensuring legal compliance and maintaining goodwill with departing employees. By including all owed compensation and adhering to state-specific timing and deduction rules, employers can avoid legal issues and provide a smooth transition for both the organization and the employee.

Contact Rimôn Law if you have any questions about how to handle the final paycheck for your employee.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.