HR Compliance Checklist: Final Pay & Wage Theft Prevention

Final paychecks are one of the most common points of compliance risk for employers. Mistakes, such as paying late, miscalculating unused vacation, or making improper deductions, can trigger wage theft claims.

The penalties for such claims often far exceed the amount originally owed. In many cases, it’s not about intentionally withholding pay. For small businesses, especially, issues usually arise from violating state-specific rules. What’s required in one state may not apply in another.

This guide offers a clear, actionable checklist to help you handle every employee departure in full compliance.

Why Next Payday Isn't Always an Option

One of the most common errors is to assume you can simply pay a terminated employee on the next scheduled payday. While there is no federal law governing final paycheck timing, state laws vary. 

• The ‘immediate payment’ states: In California and Massachusetts, the rules are absolute. If you terminate an employee, you are required to provide their final paycheck, including all earned wages and accrued vacation time, on their last day of employment. In California, for every day the check is late, you can be hit with waiting time penalties equal to the employee's full daily wage, for up to 30 days.

• The ‘next business day’ states: States like Colorado give a little more breathing room, but are still fast, requiring payment within 24 hours or on the next business day if the accounting department is not open.

• The ‘next scheduled payday’ states: Some states, including New York and Texas, allow employers to issue the final paycheck by the next regularly scheduled payday.

For businesses with remote employees, you must follow the law of the state where the employee works, not where your company is headquartered.

The Final Paycheck Compliance Checklist

To ensure a compliant employee offboarding process every time, follow these steps:

1. Determine the correct payday

The moment a termination decision is made, your first question should be: “What does this state's law require?” The rules often differ for voluntary resignations versus involuntary terminations. 

2. Calculate all wages owed 

The final check isn't just for hours worked in the last pay period. It must include other compensation the employee has earned. Such as:

• Regular wages for the final workweek

• Any bonuses or commissions

• All accrued but unused vacation/PTO, if required by state law

States like California, Illinois, and Nebraska consider vacation time an earned wage that cannot be forfeited and must be paid out. Check your state's specific rules to ensure accurate calculations.

3. Review and process permissible deductions

The temptation to deduct the cost of an unreturned company property from a final paycheck is strong, but in many states it’s illegal without the employee’s prior written consent. Only make legally required deductions and voluntary deductions that the employee has already authorized in writing (like health insurance premiums).

4. Choose the correct payment method

While direct deposit is standard for active employees, in some states, immediate payment of physical checks may be needed. Verify the acceptable payment methods of the state.

5. Prepare final paperwork

The final paycheck should be accompanied by all other documentation, including information on benefits continuation (COBRA), retirement account rollovers, and any state-required separation notices.

Toward Compliant Offboarding With DianaHR

Managing state-specific processes for employee departures can take time and effort from any founder. A simple error can prove costly for your firm. DianaHR compliance experts can help you here with their state-specific compliance knowledge to ensure legally sound offboarding. 

When an employee leaves, you can offload offboarding responsibilities to our experts. We ensure the departing employee is paid correctly and on time, with required documentation. This can enhance your employee branding and avert lawsuits. 

Ensure offboarding compliance with DianaHR. Get in touch today!

FAQs

1. What is wage theft in the context of a final paycheck? 

In the context of a final paycheck, ‘wage theft’ doesn't necessarily mean an employer has stolen money. It refers to unintentionally violating state laws regarding the timing and content of final pay. This can include paying a terminated employee on the next scheduled payday when state law requires immediate payment, failing to include accrued leaves in states where it's mandatory, or making illegal deductions. Even if it's a mistake, it can still be classified as wage theft and lead to penalties.

2. Do I have to pay out unused vacation/PTO time in a final paycheck? 

This depends on state law and your company policy. There is no federal law requiring vacation payout. However, many states, such as California, Illinois, and Massachusetts, consider accrued PTO as earned wages that must be paid out upon termination. In other states, the payout is only required if you have a written policy.

3. Can I use direct deposit for a final paycheck?

While direct deposit is the standard for regular paychecks, it may not always be permissible for final pay. Some states require a physical check to be handed to the employee on their last day. Other states allow direct deposit if the employee has previously provided written consent for it. Because the rules vary, it's essential to verify the acceptable payment methods in the specific state where the employee works.