Paying Terminated Employees
Nonprofits, more than most other types of organizations, are dependent on the skills, investment, and experience of their employees and volunteers, which means any radical shift in personnel, change to team structure, or other alteration in the status quo can have major impacts on the whole organization. For difficult and contentious decisions like terminating someone’s employment, having a documented process and plan in place can help you limit the negative impacts. Although these can be monumental decisions and should be treated with care and respect, you should always keep in mind that they are quite common, and can be done without causing undue stress on the organization.
A common issue for many organizations that lack training or documentation for termination is not paying separated employees their final wages in accordance with the law. Even for employees who were terminated for misconduct or issues with other team members, mishandling their final payments can send a bad signal to the rest of the team and land you on the wrong side of the law. The laws governing this can be complex, depending on where your organization is located. However, any issues arising from this complexity can be easily avoided if you invest some time and research into the legal expectations and make this information available to all managers who can terminate employees. Here’s some of what you need to know:
What is the relevant federal law?
The United States Department of Labor provides legal rulings, guidance, and enforcement of federal labor law, including the Fair Labor Standards Act (FLSA). Their Wage and Hour Division is in charge of enforcing issues around payments. Although federal law certifies that a fired employee is entitled to payment for all time worked up until their termination, there is no specific time requirement attached. Instead, when employees get paid after termination is typically governed by the states. Additionally, although many employment contracts include some form of severance pay, this is not a requirement of the DOL or FLSA, and is instead something negotiated during hiring or at the time of termination.
What is the relevant state law?
State labor laws differ greatly, and generally speaking, each is split into two categories of separation, one which governs termination and another which governs final payment when an employee quits or retires. Some states, such as Alabama, have no relevant laws governing this, which means it falls back to the FLSA and federal law.
How does this impact the termination process?
Whether you use a payroll service or automated tool, or it is handled by a proprietary service or dedicated team member, they should be armed with the relevant information in the event of termination so that they can follow the legal requirements imposed by the state and federal government.
For example, say you complete a project and no longer have the funds to support the whole team that worked on it. You choose to terminate two employees from the team, but they work in two different states. One works in California, which requires that terminated employees be paid immediately upon their final day worked, while the other works in Tennessee, which requires payment within 21 days or the next payday, whichever comes later.
As you get set up for exit interviews, you need to ensure that the managers or HR team conducting the interviews are given the information they need, including information about their rights. The California employee will either need to be presented with a check at their termination meeting interview or have the funds and information about their final payment paid immediately, which will need to be coordinated with the payroll processor. The Tennessee employee will need to be informed of the state law which governs this payment, ideally with a written copy of the relevant law.
While this level of coordination can seem excessive, it isn’t hard to see why it’s important. Say, for example, the terminated employees spoke after being fired and without being given all the relevant information, the Tennessee employee may be concerned that their pay was forgotten or illegally withheld, or the California employee was paid immediately due to favoritism. On the other hand, a well-trained and informed HR team or management team can avoid these potential issues, lessening the impact of the termination while ensuring the terminated employees are paid the amounts they are owed.
What about vacation time, sick time, and other benefits?
Another common issue that can be overlooked is the inclusion of paid time off (PTO), sick time (almost never paid out), and other deferred payments. As above, it is crucial that you familiarize yourself with the relevant state laws on this topic, as well as whatever employment contracts, collective bargaining agreements, or other obligations you entered into with the terminated employee.
Currently, only 20 of the 50 states require you to pay out accrued PTO, or other payments in the when there is a separation of employment (it doesn’t typically matter if it’s a resignation, term with cause or retirement). Since these laws are not universal in their implementation or enforcement, there is a lot of room for confusion among terminated employees. For example, in Maryland, these requirements are waived for organizations with less than ten employees. Some states also have a de facto requirement to pay out vacation time.
If you do not include PTO in an employee’s final payment, it’s critical that you stipulate why, citing either the relevant law, court ruling, or relevant clause of their specific employment contract, ideally providing it in written or digital form for the terminated employee to review. The potential for a messy or difficult conversation means it is critical to double- and triple-check the law, employment contracts, and other guidance to avoid undue stress or litigation.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
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