The ASE research department regularly fields questions about the disposition of an employee’s final pay when that employee dies. Particularly in an age of non-traditional domestic living arrangements, employers sometimes field claims for the money from multiple claimants. Things are complicated by the fact that the issue is mostly governed by state law, and state laws vary quite a bit from state to state. So Michigan-based employers who employ people outside of Michigan could find themselves having to do some very different things if an active employee in some other state passes away.
According to attorney Julio Pérez of the law firm Littler Mendelson, there are several concerns an employer needs to address to determine when, and to whom, it should dispense the funds.
The first question is who can claim the wages of a deceased employee. Generally the money must go either to the surviving spouse or to the deceased’s estate. Typically the payment is made to the deceased’s estate. But some states, including Michigan, specify that the payment go to the deceased’s family in a kind of pecking order that starts with the surviving spouse, followed by adult children, the deceased’s parents, and then the deceased’s siblings.
That order is in fact the one that applies in Michigan. Michigan makes an exception to it, however. If the deceased had an existing will and/or trust, and that will and/or trust has already (i.e., before the deceased’s death) filed a statement with the employer naming a person or persons as designee(s), then the money can go to that person or persons.
Some states require specific forms to be presented to the employer by a claimant for the money, and some do not. The best advice for an employer to follow in the case of a claimant who is not part of the standard pecking order is to require a demand letter or signed affidavit before releasing the funds.
There can also be a question of timing. Federal and state wage and hour laws require payment of final wages to be made in a timely way in the case of normal termination and especially involuntary termination. The real question here is whether or not the law regarding termination pay applies equally in cases of employee death. That varies from state to state. Remember that wage and hour laws generally prioritize timeliness—i.e., speed—in dispensing final pay. But probate administration practices generally prioritize doing things more deliberately in the interest of doing them correctly. Most states that require final pay to go through the probate process follow the Uniform Probate Code, which requires the passage of 30 days before pay can be dispensed to the proper party or parties.
Finally there is the question of taxes. Which taxes should the employer withhold for and not withhold for? Most states defer to IRS rules on this issue. Generally, if payment is made in the same year as the employee’s death, the employer should withhold for FICA and FUTA but not for federal income tax. If wages are paid in the year following the year of the employee’s death, then the employer should not withhold for any of the three taxes.
Claimants for a deceased employee’s final pay can put unwarranted amounts of pressure on employers because of the heightened stress on all parties, including the employer, that are inevitable at such times, as well as the urgency of the financial need and the prevalence of non-traditional living arrangement today. But the laws and regulations are, if not simple and straightforward, at least well developed and explicit. Employers must first not be intimidated by the parties involved in such claims, and second be ready to consult with legal counsel in a timely but deliberate way to make sure it gets everything right.
Sources: LARA; Littler Mendelson 2/29/16; George M.Smrtka, Esq.