March 7, 2014

The ABC’s of Abandoned Wages: What Payroll Professionals Need to Know

man throwing moneyLike an abandoned building becomes a city’s responsibility, abandoned wages become a payroll department’s responsibility, too. If payroll professionals don’t follow their state’s laws – and the state laws where employees live – the company could face tedious audits and hefty fines.

Read on for an explanation of what abandoned wages are, how they occur and what to do if your payroll department finds itself in a situation with abandoned wages.

What are abandoned wages?

Abandoned wages are wages that were paid, but never picked up or deposited by the employee.  They can result when an employee quit and simply didn’t wish to pick up their last check, passed away or did not take possession of the money they earned for any reason. Abandoned wages are a subset of abandoned property like credit balances, gift cards, safety deposit boxes and life insurance policies.

The proper handling of abandoned wages falls under the Consumer Protection Act, which may be slightly different in each state. These laws are based on the Unclaimed Property Act of 1954. The Act states that if you are withholding property that belongs to someone else, you must turn it over to the state. The state will then be considered the owner of the abandoned wages until the employee who earned them can be found and given the wages they deserve. In the meantime, states will invest abandoned wages while they locate the owner, if their payroll department can’t locate them first. While that money is invested, the state will profit from the interest earned as another source of revenue.

After wages are deposited directly into an employee’s account or wages are put on a pay card for an employee, they cannot be considered abandoned.

What is expected of you as a payroll professional?

It is a payroll professional’s responsibility to identify abandoned wages and either locate the owner or turn the money over according to state law. To identify abandoned wages, you must perform an audit of your company’s payroll records for red flags, such as a check that the employee never cashed. Typically, payroll professionals must comply with this task each year.

You must understand the requirements of your state’s law (and the state law where the employee lives if it’s not the same) for date ranges in which a wage will be considered abandoned. Most states require you to review your records for the period between July 1 of this year and June 30 of the past year, which means you would be looking for checks at least a year old. Usually, you would be required to report any abandoned wages you identify no later than November 1of the current year. Some states that have different due dates and require different check ages, so you must comply with the state where the employee works and lives.

Once you have indentified any abandoned wages according to your state’s laws, it is your responsibility as a payroll professional to contact the owner (employee or beneficiary) at the last address you have on file for the employee’s residence to let the person know he or she has unclaimed wages.

Beware of theft: It’s vital to have written procedures in place for claiming wages. For example, require that the person claiming the wages provide some form of ID so you know he or she is the rightful owner.

If the owner cannot be found after this due diligence, wages can be turned over to the state.

What happens when abandoned wages are not handled appropriately?

If payroll professionals do not report abandoned wages, their company will face a penalty of $100, plus interest charged by the state, which could prove to be quite expensive.

State laws and regulations are becoming stricter and are adding requirements like electronic reporting and direct deposit every year. With increased adoption of these advances and the availability of certain software, the payroll professional’s responsibility to process abandoned wages will decrease over time.

How can you prevent an audit?

Of course, it’s best that you audit yourself and comply with state law by reporting and turning over abandoned wages, rather than leaving your company at risk for an audit. Quite often, a state treasury department will assign a third-party company to perform the audit, which means results may vary from your own records – and not in your favor. If you are subject to an audit, request a full audit. If you are behind on reporting abandoned wages, it is possible to request amnesty from your state to catch up within a specified time.

It’s up to payroll professionals to save their companies from the pitfalls of abandoned wages. Naturally, the easiest way to avoid the liability of abandoned wages is to pay employees by direct deposit or pay cards so responsibility for these funds is transferred out of your hands as efficiently as possible. When you’re prepared, you can save your company from potential hassle and costly audits.

Read more in Payroll

Vicki Lambert, CPP (Certified Payroll Professional), serves as an adjunct faculty instructor at Brandman University’s School of Extended Education, the entrepreneurial division of Brandman University. Lambert leads the university’s Practical Payroll Online Series, a program aimed at educating payroll professionals in all facets of the industry from the basics of wages to the complex world of fringe benefits taxation and garnishments. She has authored more than 15 publications and currently serves as contributing author for XpertHR and the Workforce Asset Management Book of Knowledge.