One of the most common reasons that states end up with unclaimed property is money or other property owed to former employees.

As you know, the federal Fair Labor Standards Act requires employers to pay final compensation to their employees, but it doesn’t give you a specific timetable for doing it. Many state laws (like Illinois and California) have specific requirements that define how soon final compensation must be paid after employment ends. Neither state nor federal law wage and hour laws explain what happens, though, when an employee never comes to pick up that final check, or fails to cash it before the check expires. Why? Because state “escheat” or unclaimed property laws already do.

What is unclaimed property and why do I have to return it? 

The common law principle governing unclaimed property is called “escheat.” Under English common law, it was a rule that returned (surrendered) property to a lord or to the Crown if no lawful heir could inherit it. Today, the definition of “unclaimed property” is governed by state statute, but generally consists of stocks, bonds, cash or other personal property that your business holds for a specified statutory period. In the wage and hour context, this unclaimed property is most commonly uncashed paychecks belonging to former employees.

Unclaimed property laws prevent holders of property from keeping it for themselves, give states an opportunity to return property to its rightful owners, and provide those owners a single source (their home state) to locate and claim their property. In short, enticing as it may seem, you can’t play Lord Grantham and keep unclaimed or uncashed paychecks. If you hold unclaimed (and even expired) paychecks, state law likely binds you to remit those funds to the state where the person last worked after some period of time. Most statutes even provide for fines and penalties if you don’t return property to the state, even if you can’t find the rightful owner (e.g., if their last known address is invalid).

What Are the Rules for Returning Employee Paychecks?

First, check your state laws. Personal property (including a paycheck) that has gone unclaimed for some statutorily defined time must be turned over to the state’s designated entity for unclaimed property, provided the account has remained dormant and the business’s attempts to contact the owner have been unsuccessful. In Indiana, the designated entity is a division of the Attorney General’s office. Colorado has more fun with it: the Office of the State Treasurer maintains a “Great Colorado Payback Office.”

You can generally group states into three-, five- or seven-year escheat states. Indiana, for example, is considered a three-year state. Illinois is considered a five-year state. Generally, property of any type that goes unclaimed for three years in Indiana is eligible for reporting. However, states can apply different dormancy periods depending on the property type. For example, both Indiana and Illinois requires businesses to report and remit payroll checks after one year of dormancy, which is a common timeframe among the states for paychecks.

Second, check the reporting deadline. In Indiana and Illinois, you must report and remit unclaimed funds no later than November 1. This means that you may need to start locating former employees early in the year.

Third, nearly every state requires employers to make some good faith effort to find the former employee. If you do have unclaimed paychecks, a good way to start is by sending a certified letter to the person’s last known address. State laws typically tell you how long you need to wait after attempted notification before submitting funds to the state, but six months is typical. Using a certified letter or some other tracked delivery will help you demonstrate to the state that you have complied with any due diligence requirements in the statute.

Finally, follow your state’s requirements for submitting funds and any supporting documentation. You may have periodic reporting requirements after your initial reporting deadline as well. However, by remitting unclaimed paychecks to the state as required, you can give your business at least some protection against future claims that you did not pay wages to your former employees as required.