While this may not happen frequently, as a business owner you may end up with an unclaimed or uncashed payroll check. If you do, it is important to know the money is not yours to keep. When an employee fails to cash a payroll check, it becomes abandoned property, also known as escheatment, in the eyes of state law.
As an employer, you are legally obligated to take the responsibility of attempting to locate the employee to provide them with their wages. The state expects you to make a diligent effort to contact the employee, and keep a detailed record of each attempt to contact at which phone numbers and addresses. Laws vary by state as to how many times you must attempt to deliver the check, if a formal written notice is required, and how much time must pass by before a payroll check can be considered abandoned (anywhere from one to seven years.) Once the specified amount of time has passed, you must report any unclaimed wages to the state government. At this point, the state will actually take ownership of the check and hold the money until the rightful owner, or one of their heirs, makes a claim for it.
As an employer, if you fail to report an unclaimed check, you can face criminal penalties and fines. Do not forget that state investigators have the ability to audit your payroll records at any time. Because there is not statute of limitations on escheatment, auditors are free to delve through your entire payroll history to find unclaimed wages. State enforcement agencies have found that as few as one in five businesses are in full compliance with escheatment laws, so the incentive to investigate is quite high.