Termination Pay: Tips to Keep an Employer Out of Trouble

In today’s fast-paced business environment of multistate operations and frequent employee turnaround, it is vital for employers to stay on top of the myriad laws governing final wage payments.

State laws and regulations dictate exactly when an employer must provide the final wage payment to an employee who has voluntarily left his or her job or who has been terminated. Employers that do not comply with these laws could face substantial civil, and even criminal, penalties, some of which include imprisonment.

Most state laws require final wage payments to be issued at the time of, or within a certain number of days after, termination or by the next regular payday.


But in many states the timing rules differ for voluntary and involuntary terminations. And there may be additional special rules for employers in certain industries and for labor disputes such as temporary layoffs, lockouts and strikes.

Some state laws also specify whether unused, accrued vacation time and other benefits must be paid out, or forfeited, upon termination. To further complicate matters, payment of accrued benefits may also depend on the terms of an employer’s policy, handbook, employment contract or collective bargaining agreement, if any.

To steer clear of potential lawsuits, fines and penalties, the first question to ask should be: Is the separation voluntary or involuntary? Determining the nature of the separation is crucial to making the final wage payment correctly because the applicable legal requirements vary depending on the circumstances. The following scenarios provide guidance when answering this important question:

  • If the employee notified his or her boss that he or she is resigning or retiring, or if the employee died, the separation is voluntary.
  • If the employee was fired or laid off, the separation is involuntary.
  • If the employee indicated that he or she felt forced to resign because of intolerable conditions on the job, this is a constructive discharge, which is considered involuntary.
  • If the employee was fired after giving notice of resignation, the separation is involuntary.

Of course, there could be any number of additional scenarios. So in each instance, an employer’s best approach to properly handling final wage payments is a methodical one.

First, make sure that the circumstances of the termination are clearly documented, including the employee’s last day of work, the reason for the termination and any additional supporting documentation (i.e., past performance reviews or disciplinary problems). A sufficiently detailed termination document will also serve to expedite unemployment compensation claim processing.

Once this solid foundation is established, determine the requirements of the applicable state final pay laws. Most state wage payment laws spell out all of the following things:

  • The deadline for final payment based on the type of termination (i.e., immediate payment of final wages for an involuntary termination and payment on the next regular payday for a voluntary termination);
  • Exactly what must be included in a final wage payment, such as unpaid overtime, commissions or the value of accrued but unused benefits;
  • Permitted and prohibited deductions (i.e., the unused portion of a salary advance, an amount to cover a cash register shortage while the employee worked the register or for damage he or she caused to employer merchandise);
  • Noncompliance penalties (i.e., for failing to pay all wages due to the employee or not paying final wages within the required time period).
  • How much income tax should be withheld from overtime pay, bonuses, commissions, accrued vacation and other time (these payments may be treated as supplemental wages for federal income tax withholding purposes); and

If the relevant state does not have a wage payment law, the safest bet is to pay the employee’s final wages by the next regular payday via the usual method by which the employee is paid (e.g., direct deposit), or by paper paycheck if that would be more expeditious under deadline constraints.

Finally, do not forget about post-termination notification requirements. These include notifying:

  • The terminated employee and his or her family of their entitlement to health care continuation coverage under COBRA;
  • Child support and/or creditor garnishment agencies of the employee’s termination (and promptly answering any agency information requests), if the employee is subject to a wage withholding order; and
  • The appropriate state unemployment agency of the employee’s termination (and promptly answering any agency information requests).

Because there could be any number of unique circumstances regarding an employee’s workplace exit, an employer will best protect its own interests by taking a step-by-step approach to complying with the termination pay laws. What are the most challenging aspects of complying with the termination pay requirements in your organization?  Let us know by leaving a comment below.