Protect Your Business Against Final Pay Issues

The end of employment isn’t always the end of your involvement with an employee. If you make any of a number of common mistakes when an employee leaves, or is asked to leave, it could result in liability for your company and, in some instances, liability for you. Final pay, or paying out whatever the now-former employee is owed (while not paying more than is due) can be a minefield.
Below are some of the most common questions about ending employment and answers that will help you protect yourself and your business. Bear in mind that employment law exists at both state and federal levels. Each state has its own statutes and regulations governing at least some, if not all, of the issues in the questions below. It is critical that you understand your state’s requirements. Also note that while employment law is not contract law—not unless there’s an employment agreement—there is this similarity: you can’t arbitrarily change the rules on an employee.
For final pay purposes, does it matter if employment ended voluntarily or involuntarily?
Maybe. In some states, a company’s final pay obligations might differ depending on whether you are reluctantly bidding adieu to a good employee, or gleefully showing a bad one the door. For example, in Connecticut an employer is required to pay a fired employee his or her final paycheck no later than the next business day. An employee who quits need only receive his or her final paycheck on the employer’s next regularly scheduled payday. In states where the law makes no distinction, an employer may be able to create a written policy that treats voluntary and involuntary separation differently.
Do you need to pay out accrued vacation as part of final pay?
This depends on state law and company policy. Some states, including New York, require that there be a specific written provision that accrued vacation is forfeited upon termination in order for employers to avoid paying it out. Other states require vacation pay to be treated as earned wages that must be paid. Past practice can create a policy as surely as written provisions can. If your company has paid out accrued vacation in the past, that practice could be taken as creating an obligation—an implied agreement—to keep doing so, unless a subsequent written policy states otherwise.
When is severance pay appropriate?
Without considering any moral or values issues you may have, such as simply feeling it’s “right” to pay severance, there are some practicalities to consider. Severance pay is not required by law. It’s up to the employer whether to pay it or not, unless the company has a policy or past practice dictating that it be paid. If you don’t want to be obligated to pay severance, don’t make it company policy to pay. The virtue of paying severance is that you can obtain a release from many—but not all—types of liability. In determining an appropriate amount, you should not only consider industry norms, but also what amount of severance would induce the employee to waive his or her right to sue.
Severance is appropriate if you believe the employee may sue. Consider it to be insurance. What kinds of situations create a greater risk of liability? If the employee belongs to a protected class (e.g., race, sex, religion, disability status, age over 40). In particular, when older, higher-paid workers are laid off as part of cost cutting, there’s a chance the employee will perceive there is age-based discrimination and bring a discrimination claim; If an employee is terminated shortly after returning from medical or pregnancy/childbirth-related leave; or
If the employee previously filed a protected complaint, such as a wage-and-hour claim or claimed employment-based discrimination, or assisted as a witness with another employee’s complaint, termination may be seen as illegal retaliation.
Do you need to have a written severance agreement?
You’re providing severance to insulate the company from liability—but if you don’t have a written agreement with the employee, you may as well as just hand the employee the severance pay in small, unmarked bills. So the answer, generally, is yes. Otherwise, the money will be gone and the company won’t get anything in return. Also, when it comes to severance, even a minimal amount is generally enough to make the severance agreement enforceable.
Are there any potential future claims you can’t protect yourself from with a severance agreement?
There are a number of claims and types of liability that a severance agreement can’t protect the company from, including:
  •     Wage-and-hour (including overtime) claims;
  •     Unemployment claims;
  •     Workers’ compensation claims; and
  •     Criminal charges and administrative proceedings by government agencies—an agreement with an employee can’t keep government regulators, investigators, or prosecutors from doing their jobs.
When should you contest a claim for unemployment benefits—and when shouldn’t you?
The basic rule is, only contest an employee’s claim for unemployment insurance benefits when there is a valid basis for doing so. While what constitutes a valid basis varies by state, the usual disqualifying reasons are that an employee quit or resigned voluntarily, or was fired for serious misconduct (e.g., theft, drug use, intentional violation of company policy, repeated insubordination). Voluntary resignation disqualifies an employee from unemployment, but forced resignation does not. “Resign or we will fire you” is legally the same as firing the employee in this situation.
If you’re worried about litigation, consider that contesting an employee’s unemployment claim could be the last straw that pushes the employee into suing or contacting the Department of Labor. On the other hand, if a lawsuit or claim seems inevitable, there can be a tactical value to contesting an employment claim—the hearings can provide an opportunity. In all instances, the information provided should be the truth. Don’t say it was a layoff if it was a termination for poor performance.
A final note, pay everything a departing employee is due, document everything, get any agreements in writing, and when in doubt, don’t say anything. Following a few simple rules can prevent an often-difficult situation from becoming an expensive one, as well.
Joel J. Greenwald, Esq., is the managing partner of Greenwald Doherty, LLP and can be reached at (212) 644-1310 or Read his blog at

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