Final paychecks can be a cash conundrum for HR departments
Posted January 18, 2017
By Ed Zalewski, PHR, editor, J. J. Keller & Associates
Whether you issue paper checks, provide direct deposit, or use payroll debit cards, unusual payroll situations will crop up and must be handled appropriately according to applicable state laws. Unexpected situations involving final wages can be challenging since you may not have a way to contact a former employee. This article describes how to deal with some irregular circumstances involving final wages.
When an employee inexplicably fails to show up for several days, your reaction may range from frustration to concern. If attempts to contact the employee have been unsuccessful, your organization will likely follow its job abandonment policy and assume that the employee quit without notice.
You will need to exercise some care in these circumstances, of course. Inflexible policies could lead to issues under the Family and Medical Leave Act or Americans with Disabilities Act if the employee suffered an injury or is otherwise unable to contact the company due to a medical situation. You don’t need to become a private investigator to determine if this is the case, but attempting to reach the employee and the employee’s emergency contact person may show a good-faith effort.
If you find that an employee abandoned the job, the next step is to provide final wages by the next regular payday — or earlier, if required by state law.
If you previously obtained the employee’s authorization for direct deposit, you may deliver final wages via direct deposit — if state law allows. For instance, California law deems an authorization for direct deposit to expire upon termination. In such cases, you should send the final paycheck to the employee’s last address on record.
In the event that the check is returned as undeliverable, you don’t get to keep the money. The next step is to check your state’s unclaimed property laws. All states have such laws, and most require employers, after a period of time, to report and provide unclaimed wages. For example, Florida’s statutes indicate that wages which have not been claimed by the employee for more than one year after becoming payable are presumed unclaimed. At that time, the money must be turned over to the Florida Bureau of Unclaimed Property. The state then holds those wages for the employee.
Sometimes employees don’t cash their final checks, leading to accounting headaches for their former employers. The organization cannot use these funds, as the wages are the property of the employee. As in the previous situation, you may end up contacting the state unclaimed property agency.
Check state law for any time limits when unclaimed wages become reportable to the state. The state agency responsible for holding unclaimed wages will often have specific instructions for the reporting and remitting of the funds. Turning over the funds may at least allow you to cancel the uncashed check and balance your books.
What happens if the employee is deceased? In this unfortunate situation, you’ll again want to check state law. Some states have specific statutes relating to deceased employees’ wages that can be complicated. Often, a final paycheck can be made out to the spouse of the deceased employee. Otherwise, a check could be made out to the estate of the deceased employee.
If you pay a deceased employee’s final wages in the same year the employee died, the wages are not subject to federal income tax, but must be reported on a Form W-2 and will be subject to Social Security and Medicare (FICA) taxes, as well as federal unemployment taxes (FUTA).
If the final wages are paid in the calendar year after the employee’s death (as may happen for wages earned in December and paid in January, or for commission or bonus payments paid the following year), you should not report the payment on Form W-2. Instead, the payment would be reported on a Form 1099-MISC, which is the same form used to report payments to independent contractors. You should not withhold any federal taxes in this case.
About the author:
Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr.