Small Business Mythbusters: The Final Paycheck

Myth: All employers must provide final pay to employees on their last day on the job.

Some business owners are required to provide a final paycheck on an employee’s last day with the company. Whether that is true depends on the state in which your employee is working.

Under federal law, a final paycheck must be furnished by the next regular payday. However, laws differ at the state level. When the last paycheck is due can depend on who initiated the termination.

States that require a final paycheck be given immediately to an involuntarily terminated employee include California, Massachusetts and Hawaii. In addition, some states that have an immediate paycheck rule offer some wiggle room for employers. In Montana, for example, in situations where an immediate paycheck is required, an employer can have a written policy that extends the time to the next scheduled payday or within 15 days from separation, whichever occurs first. Small business owners should be familiar with the rules in their jurisdiction, so they can provide the last paycheck according to the proper laws. (See the full table of individual state laws at FindLaw.com.)

Vacation Time

Whether or not an employee’s final paycheck will include accrued, unused vacation time also varies by state. Some states require all unused paid time off to be added to the final paycheck amount. Other states, however, allow businesses to adopt a “use it or lose it” policy and may require an employer to notify an employee of this policy in advance.

Once business owners are familiar with the laws in their state, they should communicate the policy to all employees, ideally in an employee handbook (get ready for an upcoming post on why it’s a good idea to have an employee handbook). This will eliminate the chances of an unpleasant surprise for an employee during a termination process that may already be difficult. On the business end, small business owners are already dealing with several difficult tasks before, during and after the termination. Providing clarity ahead of time on the items that will be of most importance to a terminated employee should help prevent additional pain on both sides.

Deducting Costs

Some employers may wonder whether they can deduct costs of equipment damaged or broken by the terminated employee from the final paycheck. This differs by state and also by the classification of the employee. If the employee is exempt under the federal Fair Labor Standards Act (FLSA), the employer generally may not reduce the paycheck amount for damage to the equipment. Nonexempt employees, however, generally may see their final paycheck amount reduced, as long as the pay does not drop below the minimum wage and applicable overtime isn’t affected. While it may not be required, it’s best for a business to obtain written confirmation from employees that they understand they are responsible for paying for damaged or unreturned equipment.

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