What must be included in final pay in California?

“Employers regularly fail to include everything they’re supposed to include in final pay.” Barrie Gross pointed out in a recent CER webinar. But it’s not always obvious what must be included in the final paycheck that is due upon termination. What must be paid immediately? What can be paid at a later date?

In California, wages earned are due and payable immediately upon discharge for involuntary terminations. For resignations with at least 72 hours notice, the final paycheck is due at the time of quitting. For resignations without at least 72 hours notice, the final paycheck is due no later than 72 hours after quitting. For the purposes of our discussion, “final pay” refers to the final standard paycheck that is due upon termination or resignation.

What Must be Included in Final Pay in California?

Not including everything owed is one of the biggest mistakes employers make. While including regular pay and overtime are (or should be) obvious, what about things like sick pay? Commissions? Bonuses?

“Final pay has to include all earned and unpaid wages.” Gross confirmed. She outlined the various types of pay and told us whether or not it must be included in that final paycheck in California:

• Regular base pay must be included. For non-exempt employees, this is paid for all hours worked and overtime must be included for all overtime worked. For exempt employees it’s the salary for any unpaid period that they worked (but it can be pro-rated for the final week if the exempt employee worked less than a full week).
• Reimbursable business expenses can be excluded from the final paycheck. They must be reimbursed, of course, but this is not required to be included with the final paycheck. However, it’s still a best practice to do so whenever possible.
• Unused accrued vacation time must be included in final pay. “In California, paid vacation time is considered wages and unused accrued vacation time has to be included in final pay.” Gross confirmed. It should be paid at the final rate of pay in effect at the time of termination or resignation.
• Sick pay is excluded from final pay, as unused sick pay does not generally have to be paid out. However, there are exceptions, such as when company policy says otherwise and when a PTO policy is used instead of sick pay.
• Paid time off (PTO) must be included because typically the accrued entire amount is treated as vacation time. The only exception is if “there is an objective standard in your PTO policy to establish that accrued time is actually attributable to specific things (like illness or holidays or some other kind of specified leave)—if you have that in your policy, you may be able to show how much of the PTO time is actually for sick time. If you can, your sick time wouldn’t need to be included in final pay. But frankly, you’re not going to usually find that in most PTO policies and you should consider that you probably have to include it all in final pay. Just check with your legal counsel to be sure.” Gross advised.
• Personal days will generally need to be included, but it will depend on the specifics of the situation. “If the employee can use personal days for any reason at all in their total discretion and the only thing they have to do is schedule it with you, then California treats those days like vacation days and they have to be paid as wages with final pay.” Gross explained.
• Sabbaticals can actually go either way, depending on how they’re administered. There are several factors that make this decision, and it boils down to whether the sabbatical is treated like a vacation or not. However, it’s not that simple; if you offer sabbaticals, get your policy reviewed by legal counsel to see whether it can be excluded or whether it is actually treated more like vacation time, and thus would need to be included with final pay.
• Earned commissions and bonuses are wages and have to be paid. But which portions must be paid immediately with the final paycheck upon termination and which can wait to be paid at the normal time depends in large part on what your specific plans say. Commissions and bonuses must be included if they are already earned and calculable on or before date of termination or resignation. (Employer hardship for having to calculate a commission or bonus outside of the regular cycle is irrelevant.)
  
  They can only be excluded from the final paycheck (and paid at a later date) if they are not yet earned or not yet calculable. This could happen, for example, if a commission is considered to be earned only after a specific condition is met, such as receiving payment from the customer. You have to pay the commission once the condition is met. Another example would be a bonus that is paid based on quarterly profitability—this would be a situation where the amount is due, but it is not yet calculable at the time of termination.

The above information is excerpted from the webinar “Final Pay in California: 7 Common and Costly Mistakes You Could Be Making Right Now.” To register for a future webinar, visit CER webinars.

Barrie Gross is the founder of Barrie Gross Consulting, a human resources consulting and training firm dedicated to the ongoing management and development of human capital. Ms. Gross is a recognized expert in HR and talent management strategies.