With all the different issues restaurants are facing in the COVID-19 environment, we still have a handful of ongoing issues that always need to be addressed at the end of the year.
Escheating uncashed payroll checks to the State of California is one of the oldest, time-consuming procedures restaurateurs must conform to every year.
Escheating checks is a legal process that transfers ownership of abandoned property (uncashed payroll checks) to the State of California. For uncashed checks, the period is three years; for payroll checks, the period is one year. Therefore, this process should be completed prior to year-end each year in the restaurant industry.
Uncashed payroll checks are treated as unclaimed property that must be reconciled with the State of California. As the restaurant operator still has control over the funds, that control must be transferred to the State where individuals can make a claim to recover that property.
In the State of California, there are over $9 billion dollars in unclaimed property currently.
The restaurant operator has a duty to take reasonable effort to contact the employee with an outstanding payroll check. The current period for attempting to contact and resolve the outstanding funds is two and a half years. Certainly, you do not want to have that process going on. A better practice is to reconcile through your payroll records any uncashed payroll checks on a quarterly basis, reach out to individuals (and keep a record of that) with a process for them to receive the outstanding funds. Our recommendation after multiple attempts to resolve with the individual is to cancel the payroll check and maintain records of any unresolved funds associated with the employee’s name and contact information. The canceled amount should be entered as a long term liability on your balance sheet. Potentially, you could owe this money at some time in the future. You still get the deduction, but more importantly, you get the cash back into your account.
The technical process to be compliant with State law is onerous, and California’s unclaimed property laws are some of the strictest in the country. This process is mandatory in California each year. Companies must file annual reports that identify any outstanding funds and remit those funds to the State.
Submitting a California Holder notice is the first step to the process of escheating payroll checks to the State. Once filed, the State Controllers Office will send out information outlining the process of trying to contact the individuals identified. The second step is filing a California Holder Remit Report and Final Remittance to start the transfer process of the funds to the State.
If your head is spinning, it should be. This is not a process that any business owner should want to go through every year, and many businesses outsource this process to a third party to stay in compliance. The bottom line is that there can be penalties. The interest rate in California is 12% on the base amount per annum, starting from the date the funds were originally due.
We strongly recommend that you review your current process for resolving uncashed payroll checks. If we can assist in your process or answer any questions, please contact us. If we can help you with escheating check procedures or any other issues you are dealing with, please feel free to contact us.
About the Author
Jean Hagan, Principal
Jean has owned, operated, and consulted in the restaurant industry for more than 30 years. During that time, she worked with a well-known national chain; owned a food and beverage company that operated multiple restaurants, bars, and event spaces in the Squaw Valley area; and became the president, CEO, CFO, and shareholder of one of the highest-grossing restaurants in California. Today, Jean is Principal and leads the Restaurant Operations Consulting practice at KROST. » Full Bio