Final paychecks are always a source of employee questions. If you think about it, kinda makes sense. We don’t get that many final paychecks. Today’s reader note is questioning the number of deductions on their final pay.
Hi. I got fired last month in District of Columbia. When I asked my employer to pay my final paycheck, including my unpaid sick and vacation as well as severance pay, they put the severance pay in the same final check as bonus. Now, my deductions are through the roof – making my net pay very small.
What legal recourse do I have since the company refuses to issue a correction?
I must admit that right around the time I received this note, I saw a very informative article on “Tips for Obeying Final Pay Rules” by Lisa Nagele-Piazza, J.D., SHRM-SCP, senior legal editor for the Society for Human Resource Management (SHRM). So, I asked her if she would help answer this reader question. And thankfully she said “yes”.
I know you realize this but just as a reminder, Lisa’s comments should not be construed as legal advice or pertaining to any specific factual situations. She’s doing this as a give back to our profession. If you have specific detailed questions, they should be addressed directly with your friendly neighborhood labor attorney.
I know that the relative time when final paychecks are issued varies by state. But is the subject of how an employee’s final paycheck is processed a federal or state issue?
[Nagele-Piazza] This is generally a matter of state law. Under the federal Fair Labor Standards Act (FLSA), an employee’s wages are due on the regular payday for the applicable pay period—so that rule sets the floor for all wages owed to an employee whether we’re talking about the final paycheck or not.
Under state law, however, final wages could be due in a shorter time period or even immediately. Each state law has its own nuances, so it’s best to carefully review the applicable law.
In this scenario, the reader talks about final pay, unpaid vacation, severance, etc. Who controls how the final check is cut – employers or employees?
[Nagele-Piazza] This will usually be governed by state law, too, though the employer’s policies and practices might also come into play. For example, in some states, accrued vacation time is considered wages earned and must be included in the final paycheck. In other states, employers only have to pay out unused vacation time if they have a policy or practice of doing so.
There are limited circumstances in some jurisdictions that require an employer to provide severance pay. Typically, though, this will be a matter of contract (such as a collective bargaining agreement), employer policy, or the employer’s good-will.
Depending on how it is administered, a private employer’s severance-pay plan may be subject to the Employee Retirement Income Security Act (ERISA), which provides employees with certain rights and remedies.
What are the advantages and disadvantages of separating final paychecks?
[Nagele-Piazza] Employers need to make sure they are deducting taxes appropriately, whether it is regular income, bonuses, or other supplemental wages. Traditional severance payments are generally considered supplemental wages by the Internal Revenue Service (IRS). That means employers can choose either the optional 25 percent flat rate withholding or the aggregate method for all payments.
An employer may decide to pay severance as a lump sum or over a certain period. Each method has its own pros and cons. States laws may affect how severance is paid, and in some states, the payment type can affect the receipt of unemployment insurance benefits.
Employers might choose to separate severance pay from final pay. Final pay must be timely issued in accordance with the FLSA and state wage and hour laws. If the severance pay is not an entitlement, employers will usually have workers sign a release of claims and will provide the severance pay as consideration for the release. Employees will have an opportunity to review and negotiate the terms of the severance package and may have a certain amount of time to sign (and also to revoke) the agreement. So, employers will want to wait until everything is finalized before issuing the check.
As always, there may be additional state-law considerations. California law, for example, imposes waiting-time penalties when final pay isn’t delivered to workers on time. Sometimes, employers may opt to pay those penalties to an employee upfront if a check can’t be delivered immediately and in person. This should be in a separate check and it should be very clearly marked that the payment is intended to cover any waiting-time penalties.
The reader mentioned being fired. In general, does how an employee leaves the organization factor into how their final paycheck is issued?
[Nagele-Piazza] In some states, yes, the required timing of the final paycheck might depend on whether the employee’s separation was voluntary or involuntary. In other states, employees can be paid on the regular payday.
Last question. We don’t know if the reader took their issue to HR. If an HR professional has a question about paychecks, where can they go to get guidance?
[Nagele-Piazza] State government websites are a great place to find free and accurate information:
My thanks to Lisa and the SHRM team for helping us with this reader question. I don’t say it enough…this is why I’ve been a SHRM member for decades. Having access to this type of information is worth the cost of membership.
When an employee is leaving the organization, they need information about their final paycheck. When to expect it and how it will be calculated. Regardless of how the employee leaves. The organization should take a moment to share the information.
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