5 Ways Employee Termination Affects Payroll


Employee termination sets in motion a series of tasks for both HR and payroll department personnel. Said tasks are not terribly complicated or daunting, but they must be completed in a timely manner – regardless of the reason for termination. Both voluntary and involuntary terminations result in the same administrative responsibilities.

BenefitMall, a nationally known payroll provider based in Dallas, says that every payroll and HR department should have at least one person in place with the knowledge and skill to complete the termination tasks. More often than not however, multiple staff members work together to get things done.

Here are five ways that employee termination affects payroll specifically, represented as tasks:

1. Issue the Final Paycheck

Terminated employees will obviously receive a final paycheck. It needs to be taken care of within a reasonable amount of time. Note that there are no federal laws in place mandating how long employers have to make the payment. There are state laws however.

A few states mandate that final pay be given on the date of termination. Others give employers a reasonable amount of time. Employers should check with the appropriate authorities in their states to determine how much time they have. In cases where employers have time, BenefitMall recommends issuing the final paycheck on the same date the employee would have been paid had he or she not been terminated.

2. Explain and Offer Severance Pay

As severance pay is not mandated by law, employers have the liberty to set it up as they see fit. One employer may offer it freely with no contingencies attached. Another may require terminated employers to do certain things in order to receive severance pay. The one thing all employers must do is make the terms of severance pay clear to departing employees.

3. Explaining and Offering COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) mandates that employers with at least 20 employees and a company-sponsored health insurance plan allow terminated employees to stay on the company plan for a maximum of 18 months following departure. Terminated employees must pay the entirety of their premiums themselves. It is the employer’s responsibility to inform terminated employees of their COBRA eligibility and give them the paperwork for enrolling.

4. Addressing IWO Withholding

Employers subject to an income withholding order (IWO) are required to report employee termination to the court, tribunal, child-support agency, or attorney who originally issued the IWO. This is necessary because the employer will no longer be making support payments based on IWO withholding.

Note that employers are still required to withhold from the final paycheck. This holds true even if the final paycheck is not issued for several weeks following termination. An IWO is applicable to every paycheck regardless of when it is issued.

5. Address Unemployment Benefits

Employees terminated due to layoffs or downsizing are generally eligible for unemployment benefits as long as they meet certain federal and state requirements. Employers are required to respond as soon as they are contacted about said benefits. Contact comes from the state unemployment office.

It is in the best interests of employers to begin preparing an answer on the date of termination. If an employer believes a terminated employee is not eligible for unemployment benefits for whatever reason, the HR or payroll department should document the reasons. Any documentation the employer can offer in defense of its negative position will help when contact is made.

Employee termination sets in motion a series of tasks that have to be done to keep HR and payroll up to speed. It is all part of employing people.

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