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Pay on termination: Pay it right the first time … or else

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in Office Management,Payroll Management

Clean breaks are always the best. You don’t want any pay problems lingering after an employee terminates. What you must pay a terminating employee, in addition to any final wages, is determined under state law. And mistakes can be expensive. Two recent cases illustrate.

Case #1: Vacation pay liability

Under Massachusetts law, employers that choose to pay vacation pay to their employees must treat that vacation pay as wages for final pay purposes.

After a two-year audit, the Massachusetts Attorney General announced a settlement with two related companies that failed to pay more than $225,000 in vested, accrued vacation pay to 170 ­terminated employees. The two companies are also on the hook for a $71,300 civil penalty. As part of the settlement, the companies must take steps to ensure that they comply with Massachusetts’ vacation pay law.

Case #2: Layoff or discharge?

Under West Virginia law, employees who are discharged must receive their final pay within 72 hours. Employees who are laid off must receive their pay by the next regular payday. Employers that violate those provisions are liable for liquidated damages equal to three times employees’ final pay.

As a result of a merger, two employees’ jobs were eliminated. They received their final pay, vacation pay, a bonus and severance pay on the next payday after their final day of work. Eligibility for severance was based on employees satisfactorily performing their jobs until the last day of work. They claimed that because they were discharged, they should have received all of their final pay, including the severance, within 72 hours.

The new employer met them half way. It paid liquidated damages on everything but the severance. Company: The employees weren’t discharged; they were laid off. The severance wasn’t wages and it wasn’t subject to the rule that payment must be made within 72 hours. A trial court agreed and the employees appealed.

An appeals court affirmed the trial court’s decision. Court: When final pay is due is based on whether an employee is fired, quits or is laid off for reasons unrelated to the quality of the em­­ployee’s work. Here, the court said, the fact that the employees were eligible for severance meant they performed their jobs satisfactorily. The employees were laid off, the court concluded, so the severance wasn’t wages that had to be paid within 72 hours of termination. (Lehman v. United Bank, Inc., No. 101486, W.Va. Ct. App., 2011)

√ THE FINAL SAY ON VACATION PAY: Vacation is one of the most common benefits em­­ployers provide. Whether accrued vacation pay is due to a terminating employee is also a common question. "State laws on vacation pay after termination" summarizes state vacation pay laws. Some states have no laws, which means that company policy should prevail.

Caution: To get the full story on state wage-­payment laws, contact your state labor department.

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