Escheatment, Abandoned Property and Payroll

The common law principle governing unclaimed property is called “escheat.”

Under English common law, it was a rule that returned or surrendered the property to a lord or to the Crown if no lawful heir could inherit it. The concept of escheatment and abandoned property doesn’t naturally come to mind when dealing with payroll operations.  By definition, though, payroll can have unclaimed and abandoned property.

What it means for Payroll

With the advent of payment cards and the long-term use of direct deposit, payroll unclaimed wages are a relatively small problem for many employers.  However, many employers, particularly small business owners, don’t have the wherewithal to offer alternatives to paper checks.  Also, many workers opt out of alternative methods if they don’t have, or don’t want, bank accounts.  Paper paychecks are the main source of unclaimed wages for escheatment.

State laws govern unclaimed property, so you’ll need to call or visit the website for each state in which you do business.  Unclaimed property, in this case, paychecks, must be held by the employer for a certain period of time and then turned over to the state.  There are many parts to the compliance here, so let’s go through some steps.

Keep your payroll bank account reconciliation up to date

This will help you recognize, and flag, outstanding payroll checks.  In the real world, very few paychecks remain outstanding for a long time because most people need their pay.  You can begin contact and inquiry with employees as soon as you see a check older than 1-2 months.  Set up a follow-up system so that you have information at your fingertips when you need it.

Understand that the check, once issued, is the property of the recipient – your employee

The employer has no rights to the funds after the check is produced.  Don’t forget – the check is part of the employee’s wages once validated.  You can’t void or reverse it simply because it’s been outstanding for a while.

Verify what your bank’s procedures are for paychecks 

The checks may be “stale” after two or three months, but many banks will still cash a legitimate paycheck for someone with proper identification.  You’ll probably need to process Stop Payment requests before replacing any of the checks.  This is a Best Practice in any case; make a policy of processing a stop payment request and receiving verification from the bank before replacing any check.

Review your state laws for unclaimed property

Read the rules and know when you can turn funds over to the state.  Once the unclaimed check has passed the timeline of your state’s escheatment law, it then becomes property of the state.

IMPORTANT: The state to which you remit the unclaimed wages is the employee’s last state of residence, not necessarily the state in which the employer is located.  The state will then hold the funds until the owner (employee) or legal heirs claim possession of it. Because escheatment laws vary from state to state, you’ll need to contact your local agency to ensure that you’re in full compliance.

Know what your communication responsibilities are

You’ll be required to send written notification to the employee or former employees that they have outstanding checks.  Give the person a chance to contact you and then you can make arrangements to replace the payment.  Keep up-to-date records of each employee’s residence so you can follow that state’s escheatment laws.  Work with the HR Team to ensure that employees keep their information, including a permanent address, updated.

Finally: A written procedure guide is the best option so that anyone can follow the steps for compliance.  If a graphic works better, then by all means, use that.  The medium doesn’t matter; the material does.  Good Luck!