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October 19, 2012
The final paycheck: Do it right or pay the price

Constance Complainer is almost out of your hair. No longer will staffers have to listen to her carping about the coffee, whining about the work, or sniping about the systems. This time she took it too far and got herself fired. It will feel great to mail her that last paycheck–what’s left of it after you deduct for the things she broke during that last tirade. Maybe you’ll get around to it next week.

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Hold up, compensation pro. You probably recognized the errors in those last two sentences. But considering the complexities in rules about final paychecks, we thought this would be a good time to go over them. If you’re not 100 percent  convinced you know what to do and when to do it, keep reading: The penalties for your company if you make a mistake can be big.

Tamsen Leachman, a partner at Fisher & Phillips, LLP, (www.laborlawyers.com), is an expert in labor law. We spoke with her recently to learn more about what to do and what to avoid when issuing that last paycheck. She spoke specifically about the law in Oregon, where she practices, but the lessons may apply in other areas, too. Make sure you know what applies to your own company.

What can I deduct from the final paycheck?

“Generally, the rules about deductions from the final paycheck are state by state,” Leachman says. “The federal rules do not preclude you from making deductions from the final paycheck, but that is covered in state rules. What you need to keep in mind under the federal rules, applicable in all states, is that you can’t deduct a sum that takes the employee below the minimum wage.

"If somebody had a payroll advance and still owes you a large amount when they leave, there is only so much you can deduct from that final paycheck. For some employees, that won’t be an issue. But for someone making $10 or $12 an hour, it can be.

“One of the questions I get frequently is something like this: 'We had an employee who didn’t return a laptop. It was worth about $1,000. I’d like to deduct it from the last paycheck.' In Oregon, you can’t do that. They would have to pursue small claims action for something like that. You can offset expenses; so if the employee has an expense check coming, you could offset it against the expense check, but you can’t deduct it from wages.” Consider this a reminder that payroll and expenses should always be paid separately.

“There are only a few times when you’re issuing a final paycheck that you can deduct from the final paycheck,” Leachman continues. “If you have made a loan to the employee, you can take care of it then, but there are not many other situations where you can true it up at the end.” Always be cognizant of the minimum wage calculation she mentioned earlier, though; even if there is a loan outstanding, you cannot deduct so much from the final paycheck that the amount drops below the minimum wage.

What do I need to add to the final paycheck?

“Sometimes, especially in a small or family business, the employer is not clear about what happens when an employee leaves. If someone quits without notice, for example, and the company has a vacation or paid time off policy, the employer might get mad and decide not to pay the vacation or PTO. If that’s what your policy says, that’s fine, but you can’t just decide to do that without a written policy.”

That brings up the wisdom of clarifying these and other policies, up front and in writing. If you are in a position where you did not have a written policy, don’t despair–you can still create one, but it cannot be retroactive. “You can implement a written policy at any time on a going-forward basis,” Leachman says.

“If the person has a leave balance (for example, they had accrued 5 days of vacation at the time you create a written leave policy), you would have to honor the prior policy until that leave balance was exhausted, then move into the new policy. Then, if somebody left before they had utilized all their PTO, you would still have to pay them for the amount that predated the written PTO policy.”

Considering the complications, you may wonder if your lack of a written PTO policy is just better left alone. Maybe. But Leachman cautions that rumor and discussion can be brought up in a legal action in the absence of a clearly written policy.

“Not having a written policy creates a problem, because then people get to talk in court about what your past practice was, conversations they had with someone in management where they were assured of something, and on and on. You usually end up vulnerable because the claim will be hard to defend.”

And don’t make the mistake of thinking that only top tier managers are providing information to employees on the company’s behalf. Someone who is promoted to a supervisory position merely because he or she has the longest tenure can be a real danger to the company, Leachman says. “One of the things I do when I work with companies, especially companies that are family-owned, or they’ve been small and suddenly grow, is to really focus on their supervisors. That is where they should initially place the most resources, because the supervisors are the ones who can create the greatest liability for the company.

"The company will have almost nothing they can say by way of defense, because they put the person in a position of authority. That can apply to harassment, discrimination, pay mistakes, and other areas.”

Timing of final paycheck

“Under Oregon law, if the employee has given you sufficient notice, then you are required on their last day to give them their final paycheck,” Leachman says. “So you have to anticipate how many hours they’re going to work, and be ready to go at the end of their shift. If they don’t give you sufficient notice, you have 5 business days, or until the next regular payday–whichever comes first. If you terminate the employee, then you have until the next business day.”

Clarifying the procedures

It cannot be stated enough: Create written policies, communicate them to employees, get them signed, and do it up front. Yes, it takes time and effort. But in the long run, clarifying everything beforehand can keep the company out of court and save money too.

With regard to pay, one area is a frequent target of complaints: commissions. Leachman explains, “Commissions for salespeople may be calculated on a number of things happening over a period of time. The customer places the order. The customer pays for the order. The customer receives the item and doesn’t return it. For some companies, after all of those things happen, then the salesperson is entitled to the commission.

"When someone leaves the company, they are interested in when they are going to get their final commissions and how much they will get. Companies will sometimes put into their commission agreement that certain things have to happen before the commission is earned, but if your employment terminates before all of these conditions occur, then it isn’t earned. That’s an easy, straightforward situation,” she says.

On the other hand, if the agreement is not clear or not written, disputes can and do occur. Leachman gives the example of a former employee who believes he is owed $250, while the company believes it should be $50. “If the employer doesn’t pay the amount that’s demanded within 10 days, the employee can seek penalty wages. So in Oregon, you could end up with the penalty, which is 30 days of wages. If the employee earned $10 an hour and worked 8 hours a day, that becomes a problem pretty quickly.

"Then let’s say there’s a lawsuit over the disputed $200. If the employee prevails, even if the jury decides to split the difference and give the employee $100, the employee still is entitled to attorneys’ fees. So the employer will have paid all of their own attorneys’ fees to go through trial, all of the plaintiff’s attorneys’ fees, and the $100, and the penalty wages.

"Litigation, even over simple things like that, can easily be $50,000 or $60,000 in attorneys’ fees. So you could spend $100,000 over a $200 dispute.” You have to ask yourself if it’s worth it.

Making the final paycheck is not as simple as it seems, but with proper procedures and good advice, it doesn’t need to be difficult. And next time, see if your hiring staff can keep you from offering a job to another Constance Complainer.

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