White Paper: Abandoned Wages

Abandoned Wages ©The Payroll Advisor 2016

Introduction It goes by many names; abandoned wages, unclaimed property and escheat and all the terms are interchangeable. But no matter what you call it, it is required by law to be tracked, reconciled and submitted annually and payroll is one of the departments that must be included in the task.

Background The definition of unclaimed property or escheat (pronounced s-ch t) goes back to Merry Ol’ England. Basically it was the reversion of land held under feudal tenure to the manor in the absence of legal heirs or claimants. In the United States, under our modern law it is defined as reversion of property to the state in the absence of legal heirs or claimants. Unclaimed property consists of various types of personal property including intangible property. Examples of unclaimed property include check and savings accounts, insurance refunds and uncashed payroll checks. There is no federal law concerning abandoned property. Instead it is left up to each individual state. And every state has laws regarding unclaimed property. But how and why did the states become involved? It all started in the early part of the 20th century when California became the first state to adopt a law for the escheat of money deposited in a bank. Other states quickly followed suit. By 1954 the National Conference of Commissioners on Uniform Laws proposed a Uniform State Unclaimed Property Law with each state adopting a version of the law. However, it is important for payroll to remember that abandoned wages are not considered a wage an hour law but rather a consumer protection law. So when researching the requirements for a state payroll would not necessarily look under the state’s Department of Labor, but may have to look under the “Department of the Controller” or the “Consumer Affairs” department.

The State View Abandoned wages are also viewed as a revenue measure by the states. The state is supposed to attempt to find the owner but in the meantime, the money is held in trust by the state. The interest earned on the money belongs to the citizens of the state and can be used to fund public programs. The rights of the state to collect the abandoned wages are derived from the owner. In essence the state “stands in the shoes of the owner”. But of course the states were not all in agreement as to how to handle abandoned wages and several court cases did arise between different states as to which state has the right to the money when an employee earned the money in one state but moved to another state. The U.S. Supreme Court ruling in 1965 ended that question. In a case involving Texas and New Jersey the court ruled that the state of the employee’s last known address of record gets the money. This ruling has a major impact on payroll. It means that payroll will have to follow the reporting and remitting requirements for the state the employee last lived in which may not be the same state the employee worked in.

2

Abandoned Wages ©The Payroll Advisor 2016 The states now view abandoned property as a revenue measure and are actively pursuing the monies. Unlike in the past when the state usually assigned abandoned wages collection to an understaffed agency such as the controller or treasurer, the states now are either funding the agency to handle the collections or even turning to outside collection agencies. These bounty hunters, third party or contingent fee examiners do the work of the agency to collect the wages and are paid from the funds they collect. Unfortunately, if the payroll department lacks complete and accurate records for abandoned wages, these nongovernment auditors will employ what is known as a sampling technique. Basically, instead of spending days auditing your records they will do a quick sample and then extrapolate what you should have reported. Highly inaccurate but highly profitable for them. Some states now place a priority on collection of these monies. For example, Delaware has ruled that if the employee has no known current address (due diligence letter came back as unknown for example), and the company is incorporated in Delaware, the employer must send the money to Delaware regardless of the state of the previous address of the employee.

The Rules But what requirements do the states have when it comes to abandoned wages? Each state has its own laws. These include:  When are the wages considered abandoned  When are employers required to report and remit the wages  How the wages must be reported and remitted  And what an employer must do to satisfy the “due diligence” requirement of the state. State laws require what are known as “holders of unclaimed property” to track, reconcile and submit back to the state all property that are considered abandoned after a certain period. A holder can include financial institutions, business corporations and retailers. Basically the one “holding” the money has the liability to report it to the state. For payroll purposes the “holder” is the employer and the unclaimed property is the uncashed payroll check. How long the “holder”, must hold on to the money is governed by state law. Each state defines its period of inactivity which is known as the dormancy period. The majority of states use the general rule of one year after becoming payable as the definition of the dormancy period. These states include Alabama, California and Louisiana. But some states have a longer dormancy period. These states include Delaware (five years after becoming payable) and Massachusetts (three years after becoming payable).

When to Report and Remit The typical requirement is any wages unclaimed as of June 30th of this year must be reported and remitted by November 1 of the same year. Arizona, California and Hawaii, for example, follow 3

Abandoned Wages ©The Payroll Advisor 2016 this requirement. But the state can vary its requirement. Connecticut requires that wages abandoned as of the preceding December 31st be reported and remitted by March 31 of each year. New York is the same except it requires the payment and reporting be done by March 10th.

How to Report and Remit The state usually furnishes a report the employer can complete to list the wages being remitted. It can be a paper version or the state may even allow electronic submission. Some states are allowing submission by diskette while others have an internet site employers can use to report abandoned wages. For example Missouri requests that employers file on diskette, while Vermont requires employers reporting 10 or more accounts must file electronically, by sending either a CD or a 3.5 inch diskette; a hard copy of the report must accompany the magnetic media. Remitting can also be required electronically by some states. For example California requires the payment be made by electronic funds transfer if the amount is over $20,000. For small amounts, usually $50 or less, the states can allow the employer to aggregate the submission. However some states, such as Vermont allow aggregating for amounts of $25 or less.

Due Diligence Before reporting and remitting the abandoned wages to the state, the state requires the employer perform what is known as “due diligence”. Due diligence is basically an attempt to notify the employee to whom the wages belong that they are being remitted to the state. Generally the notice must specify when the property will escheat to the state and include the need for filing a claim to recover the property once the property escheats to the state. The holder must also provide the owner with an opportunity to indicate an interest in the property. This is done by providing a form the owner can return to the holder to provide a current address or to express an interest. The state also sets a time limit for the due diligence to be carried out. For example Nevada requires that the due diligence must be completed not less than 60 nor more than 120 days before the report is filed for each owner whose balance is more than $50. After the payroll department sends out the due diligence letters they must track the responses. If the owner provides an interest in the property, the holder will consider this as a contact or activity and will not escheat the property. The escheat period will star to run again from that date of contact or any subsequent date of contact.

4

Abandoned Wages ©The Payroll Advisor 2016

Noncompliance What happens if the company doesn’t comply? Most every state does have some kind of penalty for failure to report and remit abandoned wages. These can range from $100 per report to up to six months in prison. It depends on the state. But the biggest penalty is the interest due. When you fail to remit the monies you are penalized the amount of interest that is due from the time you should have remitted the monies until the time you did remit the monies or are audited. And these interest rates are high, can be up to 25% or more.

Conclusion Abandoned wages must be properly tracked, reported and remitted each year. For payroll to accomplish this task efficiently procedures should be written and in place. Handling abandoned wages should be a year-round task for payroll as part of the department’s normal duties and not something that it suddenly remembers it must do each June. But June is soon upon us. Are you prepared to begin properly tracking and reporting your abandoned wages?

About The Payroll Advisor The Payroll Advisor is a firm specializing in the training of payroll professionals. Founded in 1989, The Payroll Advisor currently produces and presents payroll related audio seminars, webinars and webcasts for clients and business groups throughout the country. In addition, The Payroll Advisor offers a news update service designed specifically for payroll professionals. The Payroll Pause is subscription based and only $95 per year. For more information on The Payroll Advisor products and webinars, visit www.thepayolladvisor.com.

5