Learn how to handle escheat regulations for unclaimed wages.
Did an employee never collect their paycheck? Under escheat laws you are responsible to turn it over to the state. In this article we explain escheat laws and what you need to do.
What are state escheat laws?
State escheat laws (also known as "unclaimed property" or "abandoned property") require organizations to remit unclaimed property such as uncashed checks to the state. The state holds the funds for the rightful claimants.
Escheat rules for outstanding (uncashed) checks, which differ by state, are based on the issuance date of the check. If a check is outstanding and its issuance date meets the criteria for escheating, the issuing party must eventually send the funds to the state.
As an employer, what does a state require me to do?
Escheat regulations vary from state to state. You must contact your state agency for rules governing escheatment in your state.
In general the laws require that such property, including the funds from uncashed or unclaimed payroll checks, be turned over to the state after a designated period. That period and possibly a minimum amount can vary by state.
Many states also mandate that organizations attempt to contact the owner (payee) beforehand.
Once the property (unclaimed wages) is turned over to the state, the state then holds the items for the owner or heirs until a claim is filed to collect the property.
Turning over a check to the state
If you have a check never cashed by your employee...
- A check issued to an employee for money they earned becomes the property of the employee.
- If this check is never collected by the employee, this type of check is considered unclaimed wages (property of the employee) and can't/shouldn't be voided.
- This check must be held for the employee for a set period of time (may be up to 1 to 5 years) before it is turned over to the state.
- The tax money debited from this check (the employee portion) is tax money owned by the employee and not the employer. It's the employer's federal requirement to pay this tax money.
What to watch out for
- Don't change the name on the paycheck to that of the state. The paycheck must remain under the employee's name.
- If an uncashed payroll check is voided, the money is then available in the company's checking account for use on other items. This also removes the information from the payroll and accounting data, which is no longer balanced because the employee did earn the funds.
- If later the funds are not available to pay the employee or to submit to the state, the company and its officers might be considered to have breached their fiduciary responsibility and face criminal charges.
- A voided or re-created paycheck might require amendment with fees, penalties and interest.
- Once a paycheck is issued for wages to an employee, those funds no longer belong to the company in any way.
- Under no circumstances should the funds from uncashed paychecks be returned to the general checking account.
An Escheat example
The Problem: You created a paycheck for an employee on February 1. You mailed the paycheck to the employee's last known address, and it was returned. You then held the paycheck to see if the employee comes to retrieve it.
Finding a resolution: It's now January 20 of the following year and you still have the paycheck. You can't void this paycheck; therefore, you check with your state for the state's escheat laws.
The solution: You find out your state requires you to attempt to deliver the paycheck, and if returned, you must hold the check for 2 years.
Since you have held the check for almost 1 year already, you must hold it until February 1 of the next year before you can remit it to the state. Once turned over to the state, the state will cash the check and hold the funds for the employee.
If the employee has lost their paycheck and you need to re-issue it, see Issue a lost paycheck for detailed steps.