How to Set Up a Checklist for Conducting Final Payroll and Benefits Settlements

When an employee leaves a company---whether due to resignation, retirement, or termination---ensuring that their final payroll and benefits settlements are handled correctly is crucial. These settlements are essential for both the company's compliance with labor laws and the departing employee's financial well-being. A well-structured checklist helps HR teams and payroll administrators maintain accuracy, avoid errors, and prevent potential legal issues.

In this actionable guide, we'll break down the essential steps and components to include in a checklist for conducting final payroll and benefits settlements. This process typically involves clearing out any outstanding salary, bonuses, vacation days, and ensuring that the employee's benefits (such as health insurance, retirement plans, and other perks) are properly addressed.

Verify Employee's Departure Date

The first step in the final payroll process is to confirm the employee's last working day. This date serves as the foundation for calculating the final paycheck and any benefits that need to be settled.

Actionable Steps:

• Confirm the Last Day of Work: Make sure there is a record of the employee's last day, including whether it is a full day of work or if they leave early.
• Review Employment Agreement: Check the employment contract for any clauses regarding termination notice periods or immediate resignation.

Calculate Final Paycheck

The final paycheck includes the salary earned for the period worked, bonuses, commissions, and any other compensations. It should also include deductions for any items like taxes, retirement contributions, or benefits.

Actionable Steps:

• Pro-Rated Salary: If the employee worked less than a full pay period, calculate the pro-rated salary based on the number of days worked in the pay period.
• Unpaid Overtime and Bonuses: Ensure that any unpaid overtime or performance-related bonuses are included in the final paycheck.
• Deductions : Review all relevant deductions, including:
  • Taxes: Ensure that income taxes, social security, and other required deductions are accurate.
  • Retirement Contributions: Confirm that both employee and employer contributions are processed up to the last working day.
  • Benefit Premiums: Adjust for any benefit-related deductions that need to be settled (health insurance premiums, etc.).

Manage Accrued Vacation and Sick Days

Employees typically accumulate vacation and sick days over time. Upon their departure, they are often entitled to a payout for unused vacation days, while sick days may have different policies (depending on company and regional laws).

Actionable Steps:

• Review Employee's Leave Balance: Check the employee's accrued vacation and sick leave balances at the time of departure.
• Determine Payout Policy: Refer to the company's leave policy regarding whether unused vacation days are paid out or forfeited. Some companies allow employees to carry over unused vacation days, while others provide a payout at the end of employment.
• Adjust for Unused Days: If the company offers a payout, calculate the payout amount based on the employee's daily salary.

• Sick Leave: Ensure that the sick leave policy is followed---often, sick days do not get cashed out but may be subject to other settlement terms.

Check Benefits Coverage and Transition

Employees typically receive various benefits as part of their compensation package. These benefits, such as health insurance, retirement plans, and stock options, need to be addressed during the final payroll and benefits settlement.

Actionable Steps:

• Health Insurance: Determine whether the employee will continue to be covered under the company's health insurance after their departure or if they are entitled to COBRA (in the U.S.) or other continuation options.

  • Verify Coverage Dates: Confirm the last date of health coverage and inform the employee of any actions needed to transition their coverage.
  • COBRA Notification: If applicable, send the employee the required COBRA notice that outlines how they can continue their health benefits and the associated costs.

• Retirement Plans: Review the employee's participation in retirement plans (e.g., 401(k), pension plan) and ensure that all necessary paperwork for vesting, rollover, or withdrawal is completed.

  • Vesting Status: Check the vesting status of any employer contributions to the retirement plan. Some employers may have vesting schedules that determine when the employee is eligible to receive company contributions.
  • Rollover Options: Provide information on how the employee can roll over their retirement funds to another account if applicable.

• Stock Options and Equity: If the employee had stock options or equity as part of their compensation package, review the terms of their stock option agreement. Determine if they are eligible to exercise any remaining options, and guide them through the process.

• Other Benefits: Address any other benefits that may be applicable, such as life insurance, wellness programs, or tuition assistance. Ensure that employees know how to access these benefits post-departure.

Review Severance and Other Payments

If the employee is entitled to severance pay or other compensation upon termination, make sure that these are calculated and included in the final settlement.

Actionable Steps:

• Severance Pay: Review the employee's eligibility for severance pay based on company policy or contractual agreements. Ensure that any severance payments are made in a timely manner and comply with legal requirements.
• Final Bonuses or Commissions: If applicable, ensure that any outstanding bonuses or commissions are paid out. This may include sales commissions or year-end bonuses that were pending at the time of departure.

Return of Company Property

Ensure that any company property, such as laptops, keys, uniforms, ID badges, or company-issued credit cards, is returned before the employee departs. This helps protect company assets and ensures that all items are accounted for.

Actionable Steps:

• Inventory Checklist: Create an inventory checklist to track all company property that was issued to the employee. Confirm that all items are returned and in good condition.
• Deductions for Unreturned Items: If any property is not returned, ensure that any necessary deductions are made from the final paycheck to cover the cost of replacement.

Prepare Final Documentation

In addition to final pay, it's essential to provide the departing employee with any documentation they need, including tax forms and certificates of employment. This helps ensure a smooth transition and compliance with labor laws.

Actionable Steps:

• Tax Forms: Provide the employee with the appropriate tax forms (e.g., W-2 in the U.S.) for the year of their departure. This will help them file their taxes accurately.
• Employment Certificate: If the employee requests, provide a certificate of employment that verifies their tenure and position at the company.
• Unemployment Benefits Information: If applicable, inform the employee about their eligibility for unemployment benefits and the process to apply.

Finalize Documentation and Record Updates

Finally, update your company records to reflect the employee's departure. This may include removing them from internal systems, updating email and directory listings, and ensuring that all relevant HR documentation is filed.

Actionable Steps:

• Update HRIS (Human Resource Information System): Ensure that the employee's departure is documented in your HR system, reflecting the correct last date of employment.
• Remove Access: Disable the employee's access to company systems, email, and any other sensitive information or tools they may have had access to.
• File Employee Records: Ensure that all employee records are filed according to your company's retention policies.

Conclusion

Conducting a final payroll and benefits settlement can be a complex process, but by following a structured checklist, HR teams and payroll administrators can ensure that the process is handled smoothly and in compliance with legal requirements. By paying attention to every detail---from calculating the final paycheck to managing benefits coverage---you can ensure a positive and professional departure for your employee, while also protecting your company from potential legal issues.

View Product