How to Handle Payroll During Employee Resignations and Terminations

by Brett Strauss, Esq., Vice President of HR Services

Employee resignations and terminations are a natural part of workforce management. However, they can create payroll complexities that, if mishandled, lead to compliance issues, strained relationships, and financial penalties.

Whether an employee leaves on their own terms or is let go, it’s critical that HR and payroll teams follow a clear, compliant, and timely process for final pay. Here’s a guide to managing payroll during these transitions with confidence and accuracy.

Why Final Pay Matters

Final pay is more than just a paycheck. It’s a legal obligation and a reflection of your organization’s professionalism. Mishandling final compensation can:

• Violate labor laws.
• Trigger fines or legal action.
• Damage your employer brand.
• Harm morale among remaining employees.

Proper planning ensures a smoother offboarding experience for both the company and the departing employee.

Step-by-Step: Payroll Best Practices for Resignations and Terminations

1. Know the Legal Requirements

Final pay laws vary by state and country. Key questions to answer:

• When must final pay be issued? In some states (like California), final pay is due immediately upon termination.
• What must be included? This typically includes:
  • Unused vacation/PTO (if required by law or company policy).
  • Unpaid wages.
  • Commissions or bonuses earned.
  • Severance pay (if applicable).

Staying informed of local and federal laws is essential for compliance.

2. Coordinate with HR Immediately

As soon as HR is notified of a resignation or termination:

• Confirm the final working day.
• Identify any accrued benefits or pending reimbursements.
• Check for company property returns, access revocations, and benefits adjustments.

HR and payroll should work closely to ensure all data is up to date before processing the final paycheck.

3. Process Deductions Carefully

Be cautious with final paycheck deductions. Permitted deductions may include:

• Unreturned company property.
• Benefits overpayments.
• Advances or loans.

However, not all deductions are legal in every jurisdiction. Always verify with legal counsel or, if you’re a Payentry HR Services client, our labor compliance experts before making any final paycheck reductions.

4. Issue the Final Paycheck Promptly

Final pay timing depends on:

• The reason for departure (resignation vs. termination).
• Applicable local labor laws.
• Company policies.

Offering direct deposit can ensure faster, more reliable delivery. However, in some cases, issuing a paper check may be a viable option.

5. Handle Benefits and Withholding Notices

Ensure that:

• Final taxes are withheld correctly.
• COBRA notices (or equivalent continuation coverage) are sent promptly.
• 401(k), HSA, or other benefits are closed or transitioned appropriately.

Provide a clear breakdown of these changes to the departing employee in their exit documentation.

6. Maintain Accurate Records

Keep detailed documentation of:

• Final pay calculations.
• Deduction authorizations.
• Communication with the employee.

This protects the company in case of audits or disputes and ensures a consistent offboarding process.

Common Mistakes to Avoid

• Missing payout deadlines.
• Failing to include unused vacation time.
• Applying unauthorized deductions.
• Overlooking local labor law variations.
• Lack of coordination between departments.

Being proactive and prepared is the best defense against these costly errors.

Conclusion

Employee exits are inevitable. By following a structured process, aligning with legal requirements, and using the right tools, you can ensure every employee leaves on a professional, positive note.

Do you have questions about payroll for resignations and terminations?

Let’s Talk. The Payentry HR Services team is available to answer your inquiries. Our personnel management professionals provide expert support in payroll, workforce management, human resources, benefits administration, and retirement planning services.

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* MPAY LLC dba Payentry (Company), is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other Company materials does not create an attorney-client relationship. The Company is not responsible for any inadvertent errors that may occur in the publishing process.