California Termination and Payout Laws for Employers

The loss of employees - whether through layoff, termination or voluntary resignation - often creates a stress filled situation for California employers.  Add to that the potential penalties associated with final pay and it will be expensive if you do it wrong.

California law requires final pay to include "all wages and accrued vacation earned but unpaid."  For purposes of final pay, "accrued vacation" includes traditional vacation pay as well as paid time off (PTO).  Sometimes there is very little time to issue final paychecks.  When an employee voluntarily resigns, the amount of notice the employee gives determines the due date for the final paycheck.  If an employee gives less than 72 hours notice (clock hours, not business hours), you have 72 hours from the time of notice to issue the final check.  If an employee gives more than 72 hours notice, the final paycheck is due on the employee’s last day of work.

One exception to the "final day, final pay" rule occurs in a layoff when a firm return to work date exists.  In this instance, the discharge is considered temporary and final wages are not immediately due.  Instead, you may pay the employee’s wages on the individual’s next regular payday.

In the case of the involuntary termination (including a layoff with no return to work date), you must issue final paychecks at the time of discharge.  Obviously, this requirement can create difficulties for employers who terminate employees at remote jobsites, or late in the day after the payroll employees are gone.  Always have  supervisors consider the practicalities of immediately issuing final paychecks when terminating employees.

Timing requirements are difficult in certain specific circumstances.  For example, final paychecks are due within 72 hours of a seasonal layoff of employees.  Even temporary layoffs may necessitate payment of a final paycheck: if you lay off an employee temporarily and set a return a return to work date after the regular pay period, you must pay that employee all final wages on the last day of work.  If the return to work date is within the pay period, you may pay the employee on the next regular payday.

You can pay final wages via direct deposit if an employee previously authorized direct deposit for wages.  Keep in mind that payment of final wages by direct deposit may not be practical.  For example, unless an employee quits precisely 72 hours prior to payday-and the payroll can include all unpaid vacation in the check, a direct deposit of the final paycheck will likely be late.  More often, terminations occur mid-pay-cycle and you could incur significant fees to process a special direct deposit.  Therefore, generally speaking, it is best to  not rely on direct deposit for final checks.  Instead, issue paper checks to departing employees.

Besides regular wages and vacation pay, you may wind up making other types of payments to the employee when the employment relationship ends. Similarly, employees often leave work without submitting all final expense reports, making it impossible to calculate outstanding reimbursement in the final paycheck.  Ask employees to turn in expense reimbursement requests as soon as possible and process them on a customary schedule.  Remember that an employee’s failure to promptly turn in expense reimbursement requests does not excuse an employer from responsibility to pay.  A recent California court decision indicates that employees have three years to submit expenses for reimbursement.  Make sure you issue reimbursements consistent with your company policy.

Finally, your firm may choose to offer employees severance packages at termination.  Because severance is not a requirement and is generally not considered wages, it is excluded from the final paycheck rules.  You should know that just because an employee accepts a severance package does not automatically mean he or she cannot file a wrongful termination lawsuit and that paying only certain employees severance may increase the risk of a discrimination claim from other employees.