Final Paycheck Requirements
A California Employer’s Compliance Guide
Properly handling final paychecks is one of the most critical compliance challenges for California employers. At Lerner & Weiss, our employer defense attorneys regularly assist businesses facing claims related to final pay violations. What many employers don’t realize is that California’s requirements go far beyond simply cutting a check for hours worked—they involve strict timing requirements, specific calculations, and mandatory inclusions that, when overlooked, can result in substantial penalties.
Timing Requirements: When Final Paychecks Must Be Delivered
California law establishes different deadlines for final pay depending on whether an employee was terminated or resigned:
For Terminated Employees
When you terminate an employee (regardless of the reason), California law requires immediate payment of all wages due, including:
- All hours worked through termination
- Accrued but unused vacation or PTO
- Commissions that have been earned and can be calculated
“Immediate” means at the time and place of termination. Courts have regularly upheld this strict interpretation, rejecting arguments that employers need additional time to process payroll. As we’ve seen in our wrongful termination defense practice, failing to provide this immediate payment is often included as an additional claim in termination-related lawsuits.
Best Practice: Have final checks prepared before conducting termination meetings. This requires advance planning and coordination with payroll.
For Employees Who Resign
The requirements differ based on the notice provided:
- With 72+ hours notice: Final payment is due on the employee’s last day
- With less than 72 hours notice: Final payment is due within 72 hours of notice
Common Compliance Error: Many employers mistakenly believe they can simply include the final paycheck in the next regular pay cycle. This is incorrect and can expose your business to significant penalties.
What Must Be Included in a Final Paycheck
1. Regular Wages
Include all wages earned through the last day of employment, calculated at the employee’s regular rate of pay. For employees working fluctuating schedules, ensuring accurate calculation of final wages can be particularly challenging. Our employment law attorneys regularly advise on proper wage calculation methods to minimize risk.
2. Overtime
Include all overtime earned but not yet paid. Miscalculations of overtime are one of the most common errors we see in final paychecks, particularly for employees with fluctuating schedules or multiple pay rates.
3. Accrued Vacation and PTO
California treats accrued vacation and PTO as earned wages that cannot be forfeited. Your final paycheck must include payment for all unused, accrued vacation time calculated at the employee’s current rate of pay.
Note: If your policy is legally compliant and explicitly states that sick leave is not paid out upon termination, you generally don’t need to include unused sick leave in the final paycheck.
4. Commissions and Bonuses
Any earned commissions or bonuses that can be calculated must be included in the final paycheck. If they cannot be calculated at the time of termination, they must be paid as soon as the calculation can be made.
As our experience in business litigation has shown, disputes over commission calculations are a frequent source of employment claims. Clear written commission agreements that specify exactly when commissions become “earned” are essential for every California employer.
5. Expense Reimbursements
Any outstanding business expense reimbursements should be included in the final pay or processed immediately. For more information on expense reimbursement requirements, see our article on California labor laws for remote work.
What Should Not Be in a Final Paycheck
Deductions for Negative Vacation Balances
Generally, employers cannot deduct “negative” vacation balances (when an employee has used more vacation than they’ve accrued) from final paychecks unless they have a specific written agreement allowing this practice.
Deductions for Company Property Not Returned
Despite what many employers believe, California law generally prohibits deducting the value of unreturned company property from final paychecks. Instead, employers should handle unreturned property as a separate matter through small claims court or other appropriate channels.
Deductions for Loans or Advances
While you may be able to recover advances or loans made to employees, specific written authorization is required, and the deduction cannot reduce the employee’s final pay below minimum wage.
Penalties for Non-Compliance: Waiting Time Penalties
If an employer willfully fails to pay any wages of an employee who is discharged or who quits within the timeframes specified above, the employee’s wages continue as a penalty from the due date at the same rate until paid or until an action is commenced, for up to 30 days.
For example, if an employee earning $200 per day is not provided their final check on time, the employer could face waiting time penalties of up to $6,000 (30 days × $200).
To learn more about these penalties and defense strategies, see our detailed guide on California Waiting Time Penalties.
Case Study: Successful Defense Against Final Paycheck Claims (July/August 2021)
A recent case handled by Lerner & Weiss illustrates how proper final paycheck handling can protect employers:
Our client/employer received a demand letter for $117,250.00 based upon claims alleging wrongful termination/harassment and discrimination, unpaid wages/overtime, wait time penalties, noncompliant wage statements, missed rest breaks and meal breaks, and failure to reimburse business expenses.
Our approach:
- Lerner & Weiss reviewed client documents with reference to the allegations
- We provided documents, with detailed explanation as to defense to claims made by counsel for former employee
Result: In response, former employee’s counsel dropped demand to $60,000.00. On recommendation from counsel, $60,000.00 demand rejected and $1,000.00 counter-offer made. Plaintiff’s counsel reduces settlement demand to $5,000.00. On recommendation from counsel, $5,000.00 settlement demand is rejected and $1,000.00 offer restated. Case settles for $1,000.00—less than 1% of the initial demand.
Best Practices for Final Paycheck Compliance
1. Develop a Termination Checklist
Create a formal termination checklist that includes:
- Calculation of all regular wages through the final day
- Review of overtime records
- Calculation of accrued vacation/PTO
- Verification of any commission or bonus payments due
- Confirmation all expense reimbursements are processed
2. Coordinate Between HR and Payroll
Establish clear protocols to ensure payroll is notified of upcoming terminations with sufficient time to prepare accurate final checks.
3. Maintain Accurate Time Records
Implement reliable timekeeping systems and regularly audit records to ensure all work time is properly tracked and compensated.
4. Document All Pay Policies Clearly
Ensure your employee handbook and written policies clearly state how final pay will be calculated and when it will be provided. Our employment law practice regularly assists employers in developing policies that both comply with California law and protect the employer’s interests.
5. Consider Direct Deposit for Resignations
For employees who resign with less than 72 hours’ notice, consider using direct deposit for final pay (if the employee already receives wages this way), which can help ensure timely payment.
6. Document Delivery of Final Pay
Maintain records showing when and how final pay was delivered to departing employees. For in-person terminations, have the employee sign an acknowledgment of receipt.
Handling Special Situations
Remote Employee Terminations
With the rise of remote work (see our guide on California labor laws for remote work), employers face unique challenges in providing immediate final pay. Options include:
- Overnight delivery of the final check
- Direct deposit (if already established as the payment method)
- Wire transfer
Terminations Near Holidays or Weekends
If a termination occurs near a weekend or holiday when your payroll department is unavailable, you still must provide immediate payment. Plan accordingly by:
- Rescheduling terminations for times when payroll can process final checks
- Having pre-signed checks available for planned terminations
- Establishing emergency payroll protocols
When Facing Final Paycheck Claims
If your company receives a demand letter or lawsuit involving final paycheck violations:
- Act quickly – These claims often include waiting time penalties that can significantly increase liability.
- Gather documentation showing:
- When the employee was terminated or resigned
- When and how the final paycheck was delivered
- How final pay was calculated
- Any communications about final pay
- Consult experienced employment defense counsel – Early intervention by knowledgeable attorneys often leads to better outcomes.
From Compliance to Confidence: Mastering Final Pay Requirements
Final paycheck compliance represents a significant legal risk area for California employers, but it’s also an opportunity to demonstrate your commitment to lawful employment practices. The difference between a potential five or six-figure claim and a smoothly concluded employment relationship often comes down to the systems and knowledge you have in place before termination occurs.
At Lerner & Weiss, our proven track record of reducing substantial demands to minimal settlements demonstrates that employers with proper representation and compliance practices can successfully navigate these challenges. Our case results consistently show that investing in preventive measures and experienced legal counsel yields substantial returns when claims arise.
The employers who best manage final paycheck compliance are those who recognize that compliance isn’t just about avoiding penalties—it’s about creating processes that protect the business while treating departing employees fairly. This balanced approach not only reduces legal exposure but can also mitigate the risk of claims being filed in the first place.
If your business is facing claims related to final pay or you want to review your termination procedures to ensure compliance, contact our employer defense attorneys for a consultation. With our deep understanding of California’s complex wage and hour laws, we can help transform your final paycheck processes from a potential liability into a strategic advantage.
This article is for informational purposes only and does not constitute legal advice. For specific guidance regarding your company’s situation, please consult with a qualified attorney.