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Termination Pay: When to Pay It, How to Pay It, and How to Tax It

Mindy Harada Mayo

Ryan, LLC

[email protected]

mailto:[email protected]

• Employment Tax Issues ▫ Termination Pay-When you have to pay

▫ Ramification to UI Funds

▫ WARN Act

▫ Severance Payments

▫ SUB Plans

Termination Pay

• Each state has separate laws and regulations on the governance of termination pay to employees. ▫ Determine when an employee must be paid

▫ Penalties may be assessed for noncompliance

▫ Each state has different rules Consult with a Labor Attorney

State Voluntary

Termination

Involuntary

Termination

Associated Penalties

Alabama No provision No provision No provision

Alaska By the next regularly

scheduled payday that is

at least 3 days after

employee’s notice of

resignation is provided.

Within 3 working days.

If termination is a temporary

layoff or lockout during a

pay period, the portion of

compensation earned must

be paid by the next regularly

scheduled payday.

The lesser of the employee’s

regular wages from time of

demand until time of payment

or 90 days’ wages as a civil

penalty.

$1000 fine and/or up to 1

year in jail for each violation

as a criminal penalty.

Arizona By the next regular payday

or by mail if the employee

requests

The earlier of 3 working

days or by the end of the

next regularly scheduled pay

period.

Triple the amount of the

unpaid wages.

Arkansas No provision Within 7 days of termination Up to 60 days of continuation

of wages.

State Voluntary

Termination

Involuntary

Termination


California Within 72 hours.

Immediately if a 72 hour

notice of resignation is

provided.

Strikers and movie

employees, on next

regularly scheduled

payday.

Immediately.

Within 72 hours for seasonal

employees.

Within 24 hours for oil drilling

employees.

Within 24 hours for laid off

groups of motion picture

employees.

By the next regularly

scheduled payday for other

terminated movie employees

Up to 30 days of continuation of

wages for willful violation.

A civil penalty, $50 for each

initial failure to pay wages;

$100 plus 25% of the amount

unpaid for each subsequent

violation or if violation is willful.

Colorado By the next regularly

scheduled payday

Immediately or within 6 hours

of the Payroll Department

becoming operational.

By mail on request.

Next day if payroll is

processed offsite.

The greater of 10 days’

average daily wages or 50%

of wages due for failure to pay

within 60 days of termination.

A civil penalty of $50 per day.

A criminal penalty up to $300

and/or up to 30 days

imprisonment.

State Voluntary

Termination

Involuntary

Termination


Connecticut By the next regularly

scheduled payday.

The next business day.

The next regularly

scheduled payday if the

employee is suspended

during a labor dispute or laid

off.

A civil penalty of double the wages

owed.

A criminal penalty of $200 to $5,000

and/or 3 months to 5 years of

imprisonment.

Delaware By the next regularly

scheduled payday.

By mail if requested.


scheduled payday.


Liquidated damages of 10% of the

unpaid wages per day plus a civil

penalty of $500 to $5,000.

District of

Columbia

The earlier of the next

regularly scheduled

payday or 7 days.

4 days if the employee

is responsible for the

employer’s money.

The next working day.

Within 4 days if responsible

for employer’s money.

The next regularly

scheduled payday if

suspended due to a labor

dispute.

Liquidated damages of 10% of unpaid

wages per day.

A criminal penalty up to $300 and/or

up to 30 days imprisonment for a first

violation, up to $1,000 and/or up to 90

days imprisonment for later violations.

Florida No provision No provision No provision

Georgia No provision No provision No provision

State Voluntary

Termination

Involuntary

Termination


Hawaii By the next regularly

scheduled payday.

By mail on request.

Immediately if one pay

period’s notice of

resignation is

provided.

Immediately.

By the next working day if

immediately is impossible.


scheduled payday if


dispute or temporarily laid

off.

By mail on request.

Penalty equal to the amount of

wages due plus 6% interest per year.

A criminal penalty of $100 to $10,000

and/or up to 1 year imprisonment.

Idaho The earlier of 10 days

or the next regularly

scheduled payday

(excluding weekends

and holidays).

Within 48 hours of the

employee’s written

request for payment.

The earlier of 10 days or the

next regularly scheduled

payday (excluding

weekends and holidays).

Within 48 hours of the

employee’s written request

for payment.

Up to 15 days of continuation of

wages with a $750 maximum penalty.

State Voluntary

Termination

Involuntary Termination Associated Penalties

Illinois Immediately if possible; if

not, by next regularly

scheduled payday.

By mail if requested

in writing.

Immediately if possible; if not, or

if suspended due to a labor

dispute or temporarily laid off, by

next regularly scheduled payday.

By mail if requested in writing.

Penalty of 1% of the wages

due per day, up to twice the

amount of unpaid wages if

failure to obey an order to pay

wages within 15 days.

Indiana By the next regularly

scheduled payday.

By the next regularly scheduled

payday.

10% of the wages due per day,

up to twice the amount of

unpaid wages as liquidated

damages.

Iowa By the next regularly

scheduled payday.

Commission payments

within 30 days.


payday.

Commission payments within 30

days.

Penalty of 1% of wages due

per day, up to twice the

amount of unpaid wages if

failure to obey an order to pay

wages within 15 days.

Kansas By the next regularly

scheduled payday.



payday.


The lesser of a 1% penalty of

the unpaid wages beginning

on the 8th day after payday, or

100% of unpaid wages.

State Voluntary

Termination

Involuntary

Termination


Kentucky The later of the next

regularly scheduled

payday or 14 days after

termination.

The later of the next regularly

scheduled payday or 14 days

after termination.

$100 to $1,000 fine per

violation.

Louisiana The earlier of the next

regularly scheduled


notice of resignation.


regularly scheduled payday or

15 days after termination

date.

The lesser of up to 90 days of

continuation of wages or full

wages from time of demand.

Maine The earlier of the next

regularly scheduled


demand for payment.


regularly scheduled payday or

14 days after demand for

payment.

$100 to $500 fine per violation.

Maryland By the next regularly

scheduled payday.


scheduled payday.

Up to $1,000 as a criminal

penalty.

Massachusetts By the next regularly

scheduled payday. If

there is none, by the

following Saturday.

Immediately Up to $25,000 and/or up to 1

year imprisonment for a first

violation, up to $50,000 and/or

up to 2 years imprisonment for

later willful violations as a

criminal penalty.

State Voluntary

Termination

Involuntary

Termination


Michigan As soon as amount due

can be determined with

due diligence, but no

later than 3 days after

termination for hand

harvesters who resign.

As soon as amount

due can be

determined with

due diligence.

Up to $1,000 and/or up to 1 year

imprisonment if intentional.

A civil penalty up to $1,000, or

all wages owed plus 10%

per year until paid, plus

fees and costs.

Minnesota By the next regularly

scheduled payday.

If payday is less than 5

days after the last

workday, then wages are

due by the second

regularly scheduled

payday but no later than

20 calendar days after

the last day of work.

Immediately, or

within 24 hours of

demand.

A penalty of up to 15 days,

beyond a 10 day limit, of the

employee’s average daily

earnings if not paid within 10

days of the Labor

Commissioner’s

Demand.

Mississippi No provision No provision No provision

State Voluntary

Termination

Involuntary

Termination


Missouri No provision On the day of termination.

Within 7 days if the

employee requests by

mail.

Up to 60 days of continuation

of wages.

Montana The earlier of the next

regularly scheduled

payday or 15 days from

the date of resignation.

Immediately, unless the

employer’s written policy

extends the period of time

to the next regularly

scheduled payday or 15

days from the date of

termination whichever is

earlier.

Up to 110% of the unpaid

wages.

Nebraska No provision The earlier of the next

regularly scheduled

payday or 2 weeks.

A penalty equal to the amount

of unpaid wages If not paid

within 30 days of next regular

payday, and attorneys’ fees up

to 25% of unpaid wages.

Nevada The earlier of the next

regularly scheduled

payday or 7 days.

Immediately. Up to 30 days of continuation

of wages; an administrative

penalty of up to $5,000 per

violation.

State Voluntary

Termination

Involuntary

Termination


New Hampshire By the next regularly

scheduled payday.

By mail if the employee

requests or within 72 hours

if one pay period’s notice

of resignation is provided.

Within 72 hours.




due to a labor dispute or

is temporarily laid off.

10% of the unpaid wages up

to the amount of unpaid wages

as liquidated damages.

New Jersey By the next regularly

scheduled payday.


requests.


scheduled payday.


requests.

A fine of $100 to $1,000 per

day as a disorderly persons

offense if the violation is willful.

New Mexico By the next regularly

scheduled payday.

Within 5 days.

Within 10 days for

commission, piece work

or task wages.




due to a labor dispute.


of wages.

State Voluntary

Termination

Involuntary

Termination


New York By the next regularly

scheduled payday.


requests.


scheduled payday.


requests.

$500 to $20,000 and/or up to 1

year imprisonment for a first

violation as a criminal penalty.

A civil penalty up to $500 for

each failure to pay wages due.

North Carolina By the next regularly

scheduled payday.


requests.


scheduled payday.


requests.

Up to the amount of unpaid

wages under court ordered

damages.

North Dakota By the next regularly

scheduled payday.


scheduled payday.


of wages plus 6% interest per

year until paid.

If the employer was liable for 2

wage claims in the past year,

the fine is double the amount

of unpaid wages and triple the

amount if 3 or more previous

claims exist.

Ohio By the next regularly

scheduled payday.


scheduled payday.

No provision

State Voluntary

Termination

Involuntary

Termination


Oklahoma By the next regularly

scheduled payday.

By certified mail if the

employee requests.


scheduled payday.


employee requests.

The lesser of 2% of the wages

due or the amount of unpaid

wages as liquidated damages.

A misdemeanor conviction of a

$500 administrative fine if a

second violation occurs in a 6

month period.

Oregon The earlier of the next

regularly scheduled payday

or 5 business days.

Immediately if the employee

provides a 48 hour notice of

resignation.

By the end of the 1st

business day after

termination.

Continuation of wages at the

same rate for 8 hours per day

until paid or action is

commenced.

A penalty limited to 100% of

unpaid wages only if the

employee does not notify the

employer of unpaid wages.

There is no limit if the employer

receives written notice and does

not pay the full amount within 12

days.

The Labor Department may

assess a civil penalty up to

$1,000.

State Voluntary

Termination

Involuntary

Termination


Pennsylvania By the next regularly

scheduled payday.


employee requests.


scheduled payday


employee requests.

Liquidated damages for

wages 30 days past due.

The greater of 25% of the unpaid

wages or $500.

A criminal penalty up to $300 and/or

up to 90 days imprisonment.

Puerto Rico No provision By the next regularly

scheduled payday.

If the employee is terminated without

cause, 1 to 3 months of wages plus 1

week’s wages for each year of service.

Rhode Island By the next regularly

scheduled payday.


scheduled payday.

Within 24 hours if the

employer moves, merges

or shuts down.

$400 and/or 10 to 90 days

imprisonment per violation as a

criminal penalty.

South

Carolina

Within 48 hours of

separation or by the

next regularly

scheduled payday, but

not more than 30 days.

Within 48 hours of

termination or by the next

regularly scheduled

payday , but not more

than 30 days.

Triple the amount of the unpaid

wages, plus fees and costs.

State Voluntary

Termination

Involuntary

Termination


South Dakota By the next regularly

scheduled payday or as

soon as all employer

property is returned.


scheduled payday or as

soon as all employer

property is returned.

If intentional, a misdemeanor

conviction with a penalty

double the amount of wages

owed if fraud or malice

occurs.

Tennessee The later of the next

regularly scheduled


separation.

The later of the next

regularly scheduled payday

or 21 days after termination.

$100 to $500 fine.

A civil penalty of $500 to

$1,000 if violation is willful.

Texas By the next regularly

scheduled payday.

Within 6 days. $1,000 or the amount of

wages owed.

Utah By the next regularly

scheduled payday.

Within 24 hours. 5% of the unpaid wages per

day up to 20 days.

Vermont By the next regularly

scheduled payday. If there

is none, by the following

Friday.

Within 72 hours. $500 and/or up to 1 year

imprisonment as a criminal

penalty.

Virginia By the next regularly

scheduled payday.


scheduled payday.

Up to $1,000 fine for a

knowing violation.

State Voluntary

Termination

Involuntary

Termination


Washington By the end of the pay

period (the next regularly

scheduled payday).

By the end of the pay period

(the next regularly

scheduled payday).

All wages owed plus interest

1% per month.

If violation is willful, a civil

penalty of the greater of at

least $500 or 10% of the total

amount of unpaid wages, up

to a maximum of $20,000.

A misdemeanor conviction

may also apply with up to 90

days in a county jail and/or

up to a $1,000 fine.

West Virginia By the next regularly

scheduled payday.

Immediately if on pay

period’s notice of

resignation is provided.

Within 72 hours.


scheduled payday if


dispute or the employee is

temporarily laid off.

All wages due plus triple that

amount as liquidated

damages.

Attorneys’ fees and costs in a

civil action.

Wisconsin By the next regularly

scheduled payday.


scheduled payday.

Within 24 hours if the

employer moves or closes.

Up to $500 and/or up to 90

days imprisonment

State Voluntary

Termination

Involuntary

Termination


Wyoming Within 5 working days. Within 5 working days.


scheduled payday if


dispute or the employee is

temporarily laid off.

A misdemeanor conviction

with a $500 to $750 fine if

failure to properly pay the

terminated employee was

willful.

There are approximately 21 states that have the same regulations regarding

termination pay regardless of the type of termination – voluntary or involuntary.

For involuntary terminations, 8 states require final pay to be paid immediately.

There are 4 states that have no provisions on termination pay regardless of type of

termination, nor do they any penalty provisions.

Ramifications on UI Funds

• At least 23 states have depleted their UI reserves ▫ Results in future increased rates

▫ Potential surcharges, bond measures

Increase Annual FUTA Tax per Employee over normal

State 2012 2013 2014 Arizona $63 $84 $105 150% Arkansas $84 $105 $126 200% California $84 $105 $126 200% Colorado $63 $84 $105 150% Connecticut $84 $105 $126 200% Delaware $63 $84 $105 150% Florida $84 $105 $126 200% Georgia $84 $105 $126 200% Illinois $84 $105 $126 200% Indiana $105 $126 $147 250% Kentucky $84 $105 $126 200% Missouri $84 $105 $126 200% Source: U.S. Dept. of Labor, Employment and Training Administration, UI Program Statistics

Increase Annual FUTA Tax per Employee over normal

State 2012 2013 2014 Nevada $84 $105 $126 200% New Jersey $84 $105 $126 200% New York $84 $105 $126 200% North Carolina $84 $105 $126 200% Ohio $84 $105 $126 200% Pennsylvania $84 $105 $126 200% Rhode Island $84 $105 $126 200% South Carolina $105 $126 $147 250% Vermont $63 $84 $105 150% Virgin Islands $84 $105 $126 200% Wisconsin $84 $105 $126 200% Source: U.S. Dept. of Labor, Employment and Training Administration, UI Program Statistics

Payments made at termination

• Health Insurance ▫ Premiums paid by employers after layoff or termination not

taxable to employee assuming accountable plan requirements are met

• Outplacement Assistance ▫ Not a taxable event if provided as part of an outplacement

plan to affected employees

• Severance ▫ Fully taxable for all payroll taxes

May affect unemployment benefits

Employment Tax Issues

Facts to address when undergoing workforce transition:

• WARN Act-how much notice must be given to worker

• Many states prohibit state unemployment benefits while severance payments are made

• Wage continuation vs. lump sum benefits can make a difference

For example: Ohio prohibits an overlap of severance and state unemployment benefit when employer properly reports payments


Facts to address when undergoing workforce transition:

• WARN Act- ▫ An employer must give notice if an employment site will be permanently or temporarily

shut down, resulting in an employment loss for 50 or more employees during a 30 day period.

▫ Employers are covered by WARN if they have 100 or more employees, not counting employees who have worked less than 6 months out of last 12 or work an average of less than 20 hours per week.

▫ If there is a mass layoff of 500 or more employees or for 50 to 499 employees if they make up at least 33 percent of the employer’s active workforce.

▫ Written 60 day notice must be given.


Severance Payments

• Excluded from definition of wages depending upon employment agreement and buyout provisions

• Ability to avoid FICA, FUTA, and SUTA taxation as well as withholding for the employee

Form W-2

With regard to providing Form W-2, if an employee terminates

employment prior to the end of the year, there are two possibilities:

1. The employer can wait until January 31 of the following year to

send Form W-2 to the terminated employee, or

2. If the employee requests, in writing, for a Form W-2 before the

end of the year, the employer must provide the Form to the

terminated employee within 30 days of the written request.


Can severance payments be an event not subject to payroll taxes?

Buyouts

SUB Plans


Supplemental Unemployment Benefit Plan

• Alternative to Severance pay

• Close the gap between state unemployment benefits and the employee’s normal wage

• Not considered “wages” for FICA and FUTA

• Reduces Employer and Employee payroll taxes


• Quality Stores ▫ In a long-awaited decision, the U.S. Court of Appeals

for the Sixth Circuit held in United States v. Quality Stores, Inc., September 7, 2012, that certain dismissal payments were Supplemental Unemployment Compensation Benefits (SUB) exempt from FICA taxes.

http://www.mwe.com/files/Uploads/Documents/Pubs/Quality-Stores-Sixth-Circuit-opinion.pdf

http://www.mwe.com/files/Uploads/Documents/Pubs/Quality-Stores-Sixth-Circuit-opinion.pdf


• Protective Claims ▫ The due date for the protective claim is three years

from April 15 of the calendar following the year in which the severance payments were made. For example, for FICA taxes paid in 2009, a protective claim should be filed by April 15, 2013.

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Termination Pay: When to Pay It, How to Pay It, and How to Tax It

Mindy Harada Mayo

Ryan, LLC

[email protected]
