Unpaid Final Paycheck
California labor laws are put into place to punish employers who do not properly follow the procedures needed to be done when an employee leaves the workplace. Employees are entitled certain rights upon termination or resignation from a job. Violations of these rights include delaying of the final paycheck, improperly presenting the final paycheck, and not giving the full amount rightfully owed. There are also rules and exceptions that some employees and employers alike may not be aware of. Employers are at risk of hefty and otherwise easily avoidable penalties if not thoroughly educated on the subject.
The employer must present the final check to the employee at the time of termination or discharge. On the employee’s final day of work, their final check must include all of their earned wages which have not been paid. If the employee voluntarily quit, then the employee must still promptly give them their last paycheck. However, this period depends on if the employer gave sufficient notice to their employee of their resignation. If notice was given seventy-two hours prior to quitting, then the employer must give the check on the last day of work. If there was less than seventy-two hours of notice, then the employee must be given the final paycheck within seventy-two hours of their final work day. Some forms of earned income that are often overlooked include:
Failure to pay the final paycheck on time will create waiting time penalties, which add on to the total amount owed to the employee. While an employee leaving the workplace can very commonly be a subject that is overlooked, business owners should educate themselves on the proper procedures to follow. This is critical to avoid extra expenditures and penalties that could have been easily avoided.
Typically, most stock option plans allow departing employees to exercise their options within 90 days of employment termination. If the options are not exercised before that date all vested but unexercised options lapse. This 90-day window becomes critical, particularly for early stage startups, where the departing employee may not wish to exercise their options just yet as there is no ready market available to trade such shares and the value of shares is mostly "on-paper" but not exercising them would also mean that the employee is giving up the right to purchase a potentially valuable stock at a cheap rate.
To remain competitive and to attract top talent, startups should consider extending this post-termination exercise window beyond 90 days. Some well-known companies have already chosen to diverge from this usual path. Companies like Pinterest, Square, and Coinbase offer employees who have worked for a minimum period of time an extended window in which they can choose to exercise options. Triplebyte, a tech recruiting website, recommends that companies implement a 10-year exercise window instead, which may become the next industry standard.
From the company's perspective, choosing to extend this exercise period is a serious and tricky decision. There are quite a few things to consider when making such a decision as it involves both legal and financial/tax implications.
With the technology industry growing so rapidly and their market for employees being in such high demand, there will always be need for more and more incentives to retain the most talented workers. However, there must be a balance between keeping the workforce happy and running a successful operation. Every startup is different, and every approach as to how best to incentivize their team must also be unique.
This blog is maintained by IndUS Counsel, a Silicon Valley law firm. The authors are either members of IndUS Counsel or guest contributors.