Human Resource Tips: Final Paychecks – What You Need to Know

By: Karla Dobbeck, PHR - Human Resource Techniques, Inc.

Vacation Pay at Termination - In Illinois, vacation pay is considered “wages” if earning it is tied to length of service. In other words, if an employee earns vacation after a certain period of time, that time is earned and considered “wages” at termination. When an employee separates for any reason, make sure to calculate and pay out any ‘accrued’ or ‘earned but unused’ vacation as part of the final wages.

On the flip side, if an employer allows an employee to ‘borrow’ against unearned vacation time, at termination, the employer cannot deduct vacation hours from the employee’s final paycheck.

Bonuses at Termination – Many employers are unaware that very specific rules apply to bonus calculations including how they must be calculated at termination. If an employer ties a bonus to any type of work or productivity and informs the employee that a bonus is available, at termination a pro-rated portion of that bonus needs to be calculated and paid out to the departing employee.

Deductions from Final Paychecks - Illinois law prohibits an employer from making any deductions from an employee’s final paycheck for most reasons without the departing employee’s consent. Common deductions include uniform costs and tool or equipment purchases. In order to take a deduction from a final paycheck:

1. The employee must give you written permission to do so at the time the deduction is made.
2. The permission must be given freely (don’t withhold the check until the employee signs).
3. The amount deducted must never cause an employee to earn less than minimum wage for all hours worked.

Employers who take a deduction without following these steps must write the Illinois Department of Labor and ask for an exception. The department will rule on the merits of your reason and send you a finding within sixty (60) days. If the ruling is against you, the money must be returned to the employee immediately. If the pay equals less than minimum wage, you will be required to return at least that portion.

Cash Advances - Employers who loan money are wise to have employees sign an on-demand note at the time the loan or assistance is given. Include the amount of the loan, the repayment schedule and what will happen should employment cease before repayment is completed. Although special rules apply to cash advances, having a very solid paper-trail, including a promissory note will allow you to take recoup at least part of the loan at termination and have the evidence you need to defend your action if needed.

In addition, the employer and employee should also sign a statement authorizing and acknowledging re-payment through payroll deductions. If the employee notifies you that he/she is leaving, the original paperwork should be copied. An itemization of the repayment to date should accompany a new authorization for any balance to be deducted from the final paycheck.