Laying off employees? Here’s what your business actually owes them

There’s no easy way to lay off employees. But there are plenty of ways to make an already difficult situation much worse.

Between wages, health insurance, severance, and government notices, there’s more to a layoff than delivering the bad news and wishing your employees well.

What do you owe employees on their final paychecks?

You can eliminate a position, but you can’t eliminate the wages an employee has already earned. You must pay laid-off employees for all hours worked, including any overtime owed. 

Federal law doesn’t usually require immediate payment, but wages usually have to be paid by the regular payday. However, state laws can impose much shorter deadlines. For instance, Alaska requires employers to pay terminated employees within three working days. In California, final wages are usually due immediately when an employee is laid off.

If you willfully miss the deadline, you could face penalties worth up to 30 days of the employee’s wages. That’s a pretty expensive mistake just for messing up payroll. 

And before you close out payroll, check whether there’s more money on the table: 

• Unused vacation or PTO: That vacation time your employee never got around to taking? Depending on state law and your policies, you may still have to pay for it. For example, California treats earned vacation as wages that have to be paid at termination. 
• Earned commissions and bonuses: Sales commissions don’t disappear when an employee leaves. Whether you owe them depends on your compensation agreements and applicable laws. 

And if you think you can withhold earned wages because someone hasn’t returned a company laptop or signed a separation, think again. Wage-deduction rules still apply. 

So the final paycheck is handled. That doesn’t mean your business is officially off the hook. 

Do you have to offer continued health coverage?

If health insurance was part of the job, layoffs trigger another countdown: COBRA. 

Federal COBRA typically applies to group health plans sponsored by private employers with at least 20 employees, based on employment during the previous calendar year. It allows eligible former employees and dependents to continue their existing coverage for up to 18 months. 

COBRA lets former eligible employees keep their health insurance, but it usually doesn’t require you to keep paying for it. That’s an important distinction when you’re trying to cut expenses. They can be charged the full premium, including your former contribution, plus up to 2% in administrative fees. 

What you do have to handle is the paperwork. You usually have 30 days to notify your plan administrator of a qualifying layoff. The administrator then typically has 14 days to send the COBRA election notice. If you’re also the plan administrator, a 44-day deadline usually applies and may be measured from a later coverage-loss date. 

Don’t assume that you’re exempt simply because you have fewer than 20 employees. Some states have their own continuation coverage requirements, commonly known as mini-COBRA laws. 

What about severance?

Federal law usually doesn’t require severance pay. However, your employment contracts and company policies may cancel that out. If you’ve ever wondered whether anyone actually reads the employee handbook, a dispute over severance is one way to find out. 

Even when severance isn’t required, you can choose to offer a lump-sum payment, temporarily subsidize health insurance, or provide outplacement assistance. 

Just remember that separation agreements have their own rules, and a payment doesn’t automatically protect you from future claims. 

Here comes the paperwork

Somehow, reducing headcount only increases the number of people expecting paperwork from you. 

Some states require separation notices or unemployment insurance information. New York, for example, requires employers to provide workers with a Record of Employment that has information needed to file for unemployment. 

There’s also the federal Worker Adjustment and Retraining Notification (WARN) Act. WARN usually requires employers with 100 or more employees to provide 60 days’ advance notice before qualifying mass layoffs or plant closings. A qualifying mass layoff usually involves at least 50 employees at one location, subject to additional thresholds. Most small businesses won’t fall under federal WARN, but some states have stricter rules. 

You’ll also have to respond accurately to unemployment insurance requests, document why positions were eliminated, and review whether your selection criteria disproportionately affected protected groups. 

Finally, you’ll have to coordinate payroll, benefits, retirement plans, and outstanding reimbursements. If employees work in different states, check the requirements for each location. 

Before making the announcement, double-check the deadlines, payments, and notices that apply to your business. Racking up avoidable legal penalties pretty much defeats the purpose of cutting costs.