Terminating employees can be a daunting task. Failing to follow your state or local rules when terminating an employee can make the task exponentially more difficult and expensive. When a business plans on firing or laying off an employee (known as “involuntary termination”) it is imperative business owners consult state and local laws prior to making any personnel changes. This is because, while there is no federal rule pertaining to the timing of final paychecks for those terminated, almost every state (with the exceptions of Alabama, Georgia, Florida[1], and Mississippi) has legal requirements for the timing of final paychecks for discharged employees. [2] And an employer who involuntarily terminates an employee is often held to more stringent requirements for final payment than an employee who quits, resigns, or retires (“voluntary termination”).[3]
Timing Requirements After Involuntary Termination
While there are no federal laws or regulations that require final paychecks be issued within a specific amount of time after an employee is terminated, almost every state requires payment after involuntary termination be made within a specific timeframe. Most states require final paychecks to be issued no later than the next scheduled payday. However, some states have more immediate requirements. For example, Utah[4] requires payment within 24 hours of termination while Connecticut[5], District of Columbia[6], Hawaii[7], Illinois[8], and Oregon[9] require payment on the next business day following involuntary termination. Other states, including California[10], Colorado[11], Massachusetts[12], Missouri[13], Montana[14], and Nevada,[15] require payment immediately upon involuntary termination (i.e. the date of termination).
Types of Compensation Included in Final Paycheck
In addition to timing, business owners must ensure they understand what types of compensation are required to be included in a final paycheck. Some states include accrued vacation, non-discretionary bonuses, tips, and/or commissions in their definition of “wages” and therefore these types of compensation must be included in any final paycheck. For example, in Colorado, earned vacation pay is considered wages under state law and therefore is required to be paid out at the time of termination, but unused sick leave is not.[16] By contrast, in Delaware, compensation for wage “supplements” (like earned vacation or expense reimbursements) are not considered wages and payment of such supplements is therefore governed by the agreement of the parties and a written policy requiring such payment.[17]
Penalties for Failure to Timely Pay Final Wages
Penalties for failing to timely pay a terminated employee can be very steep. In Massachusetts, the Massachusetts Wage Act mandates that employers pay employees who are involuntarily discharged from employment on the date of termination and that an employee receive actual tender[18] on the date of termination. M.G.L. c. 149, § 148. An employer who fails to do so is liable for mandatory treble damages and mandatory reasonable attorneys’ fees and costs. M.G.L. c. 149, § 150. Even the most well-intentioned employers are subject to these mandatory penalties.[19]
For example, if a business owes an employee $3,000 upon termination, failure to provide the employee with actual tender of funds on the date of termination means the business now owes the employee $9,000 the day after termination. If the employer pays the employee $3,000 the day following termination, the employee still has a cause of action under the Wage Act for payment of the remaining $6,000 in damages owed. And if the employee hires an attorney to file a lawsuit to assist in the collection of these wages and the employee prevails, the business will be on the hook for the employee’s reasonable attorney’s fees and costs (which often amount to tens or hundreds of thousands of dollars).
Some states even mandate criminal penalties and fines for failing to timely pay an employee’s wages. In Rhode Island, wage theft is a felony, and employers can face up to three years in prison, a fine of up to $5,000, or both.[20]
Finally, it should be noted that some state laws allow directors, officers, and even shareholders of a business to be held personally liable for unpaid wages owed to an employee. In these states, bankruptcy proceedings or closing a business will not protect business owners from the liability for unpaid wages.
Additional Considerations
In addition to timely payment considerations, employers need to be mindful of other laws that may apply to their personnel decisions. This is especially important when handling larger layoffs, where laws such as the federal Worker Adjustment and Retraining Notification (WARN) Act may apply. The WARN Act requires employers to provide sixty days’ advance notice to employees when conducting a “plant closing” or “mass layoff”.[21] While the federal WARN act applies to employers with one hundred or more full-time employees, there are several state level “Mini-WARN” Acts with a range of differing requirements. These Mini-Warn Acts vary wildly and include requirements such as extended notice periods, lower employee thresholds, and mandatory severance. As items under these acts include required wage payments, employers may also find themselves individually liable for damages if found in violation of WARN or Mini-WARN Act requirements.
Conclusion
The moral of the story? Consult your state and local laws before making any involuntary termination decisions for your business. If you are unsure of how to proceed, seek out an experienced labor and employment attorney for advice. Involuntary termination is solely in the control of the employer and therefore it is the employer’s duty to ensure it is following state and local rules with respect to final paychecks for involuntarily terminated employees. Failure to do so risks your business (and potentially its individual directors, officers, and shareholders) facing hefty damages, penalties, and even potential jail time.
——————————————————————–
This DarrowEverett Insight should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Unless expressly provided, this Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
[1] However, be aware that Miami/Dade County has a Wage Pay Ordinance requiring employers to pay employees within a “reasonable time” after termination (which is defined as “no later than fourteen calendar days from the date on which the work is performed unless the employer has established, by policy or practice, a pay schedule whereby employees earn and are consistently paid wages according to regularly recurring pay periods in which case such pay schedule shall govern.”) See Section 22: Wage Theft of Miami-Dade County Florida Code of Ordinances.
[2] See, generally, https://www.dol.gov/agencies/whd/state/contacts.
[3] However, state and local laws also define the timing for final payment when an employee quits, resigns, or retires. You can contact your state labor department for more information.
[4] See Utah Code § 34-28-5(1).
[5] See Connecticut General Statutes §31-71c.
[6] See D.C. Law § 32-1303.
[7] See Hawaii Revised Statutes Ch. 388-3(a) (note that the law requires payment in full at the time of discharge or on the next business day if immediate payment is not possible).
[8] See Illinois Compiled Statutes, 820 ILCS 115/5 (note that the law requires payment in full at the time of discharge or on the next business day if immediate payment is not possible).
[9] See Oregon Revised Statute § 652.140.
[10] See California Labor Code § 201.
[11] See Colorado Revised Statutes § 8-4-109.
[12] See Massachusetts General Laws ch. 149 § 148.
[13] See Missouri Revised Statute § 290.110.
[14] Montana Code § 39-3-205 (note that employer has option of maintaining a written policy that extends this time to the next scheduled payday or within 15 days, whichever is first).
[15] Nevada Revised Statute § 608.020.
[16] See C.R.S. § 8-4-101(14)(a)(iii).
[17] See 19 Del. C. § 1109.
[18] See Clermont v. Monster Worldwide, Inc., 102 F.Supp.3d 353, 356 (D. Mass. 2015) (Wage Act violated when employee paid all wages by EFT on date of discharge but funds did not arrive until the next day); see also Lawless v. Steward Health Care System, LLC, 894 F.3d 9, 22 (2018) (“An employee who does not receive her due wages [when mandated by the Wage Act] – even an employee who is paid in full a day later – suffers a cognizable injury within the purview of the statute.”).
[19] See, e.g., Dixon v. City of Malden, 464 Mass. 446, 452 (2013) (“It is settled law that the Wage Act impose[s] strict liability on employers” and “[e]mployers must suffer the consequences of violating the statute regardless of intent.”).
[20] See Rhode Island Payment of Wages Act, R.I. Gen. Laws § 28-14-1 et seq.
[21] https://www.dol.gov/sites/dolgov/files/ETA/Layoff/pdfs/_EmployerWARN2003.pdf
