Unclaimed Wages, Hidden Dangers

Unclaimed payroll checks may be a nuisance, but for the incautious employer they can also be a dangerous hidden liability, according to Anthony Andreoli and Josiah Osibodu of Deloitte & Touche, at an APA Congress workshop session on Escheatment and Unclaimed Wages.

The key to understanding escheatment, Andreoli said, is the fact that an employee never gives up his or her right to a wage payment, no matter how long that payment remains uncollected. At a certain point--in most states, after one year-- uncollected wages are considered abandoned and the state takes custody of them on behalf of the former employee; this transfer of abandoned funds is the actual escheatment process. All states require that employers within their borders regularly report and remit unclaimed wages. The state then holds these funds on behalf of the owner but is free to use this money until the owner actually comes asking for it. Remittance must be made to the state of the employee's last known address or, in the absence of an address, to the state of the employer's incorporation.

Although many don't realize it, Osibodu said he has "yet to see a company that does not have unclaimed property." Knowing that most employers have unclaimed-wage liabilities and given the huge amounts involved (between $3 billion and $5 billion in unclaimed wages are reported to states annually, according to Andreoli), many states have begun aggressive campaigns of escheatment-law enforcement. The difficult financial situations in which many state governments currently find themselves have encouraged these aggressive enforcement policies, since as noted, states can use these funds to finance their own operating expenses. Since there is no statute of limitations on unclaimed property, potential employer liability can be huge, Osibodu said.

The problem is compounded by the fact that if an employer has failed to keep accurate records of its unclaimed-wage liability, a state auditor can estimate the amount. For example, an auditor can estimate the amount by taking the liability of a representative current period and projecting backwards for the entire history of the company.

Given the aggressive auditing strategies of many states and the huge potential liability of the noncompliant employer, Osibodu recommends that companies with outstanding unclaimed-wage holdings be proactive in settling their accounts with the states. Most states have voluntary disclosure agreements, under which an employer can voluntarily make good its unreported unclaimed wages. Under such programs, the state will generally waive penalties and interest on unreported amounts and limit the period of audit--generally back only 10 years rather than (as the state is legally entitled to do) the company's entire operating life. Voluntary compliance can still prove expensive, Osibodu acknowledged, but is likely to be less costly to an employer than a state-initiated audit.

By Richard Vollmar, CPP