California Termination and Payout Laws for Employers

Losing employees - whether through layoff, firing, or voluntary resignation - can be stressful for California employers. If you are laying off or firing workers, you have to make sure you don't expose your company to wrongful termination lawsuits. And, you have to follow California's strict rules about final paychecks.

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).

What's more, you may have to issue a final paycheck very quickly. 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 situation, the discharge is considered temporary and final wages are not immediately due. Instead, you may pay the employee’s wages on the next regular payday.

In the case of 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. The legal obligation to issue an immediate final paycheck always has to be part of the analysis of when and where to terminate employment.

Timing requirements are difficult in some 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 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 owe other types of compensation 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.

Your company may also 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. In other words, you don't have to pay the employee's severance right away. However, you still have to pay the employee's earnings and accrued vacation and PTO according to the deadlines set out above.

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