By: Kyla Miller and Michael Afar
Last week, the financial world was upset by the seizure and shut down by regulators of two regional banks — Silicon Valley Bank and Signature Bank. With almost no warning, employers went from a position of high liquidity to one where their deposits were frozen. As depositors of those banks feared for the money in their accounts, the Federal Reserve, Treasury Department, and FDIC announced jointly that they would step in to guarantee deposits, including beyond the ordinary limits covered by the FDIC. As the week went on, regional bank stocks plunged, with First Republic Bank seeing its stock fall to an all-time low, prompting several large banks to jointly provide $30 billion in deposits to aid the failing institution. Some fear this volatility is just the beginning.
For employers that rely on regional financial institutions to fund payroll, this continued volatility could create major problems. Despite the bailouts, one thing is clear: employers should be prepared for immediate and unanticipated liquidity crisis as the financial industry remains in a state of uncertainty and the tech industry continues to take a downturn.
If the scramble feels familiar, that’s because it is. Another major, unanticipated crisis affected employers in recent years. On December 11, 2021, the Ultimate Kronos Group, a major HR technology provider, was hit with a ransomware attack that crippled thousands of employers across the country with an inability to access time and pay records. This emergency created chaos around attendance, scheduling and payroll, and ultimately spawned a wave of litigation against the companies that relied upon Kronos.
These crises are a sober reminder of the fragility of the systems and institutions that employers often rely upon to satisfy their wage and hour obligations to employees. When faced with these circumstances, employers may not have enough cash on hand and may consider skipping payroll obligations to conserve cash, or may be unable to access the records needed to process payroll, handle timekeeping, and complete other necessary HR functions.
But, even in crisis, employers across the United States are subject to wage and hour obligations, and many states have specific rules regarding timing of payment, method of payment, and penalties for failure to comply with those specific rules. Because of that, employers must endeavor to satisfy their legal obligations notwithstanding the disruption caused by a third-party, regardless of how unforeseen or chaotic it may seem.
In Part 1 of this blog series, we provide an overview of employer’s wage and hour law obligations in crisis, and issues to be aware of regarding short and long term solutions. Subsequent blogs will dive deeper into these topics.
Have An Emergency Plan
Sometimes you don’t realize you needed an emergency plan until it is far too late. Let recent events serve as an opportunity to review your policies and practices to determine how your company would react moving forward in the event of a crisis that would affect how you ordinarily handle timely payment of wages to your employees.
Method of Payment Concerns
Confirm you maintain up-to-date records for employees who have authorized direct deposits, and which financial institution they identified. In the event of a crisis with an institution authorized to accept direct deposit for any employee, be prepared to timely and accurately pay those employees by paper check until the employee can establish a new bank account.
Delayed Payment Concerns
Under federal law, primary liability lies with untimely payment of overtime wages for non-exempt employees. Although the FLSA does not contain an absolute requirement that overtime be paid as soon as it is earned, the Department of Labor regulations provide that employers must pay overtime as soon as it reasonably can when circumstances beyond its control make it impractical to pay overtime on the regular pay date. What is “reasonable” in a crisis is very much in dispute. We recommend being prepared to create an emergency response team to create a plan to respond to a payroll crisis in a timely manner. Key issues to consider include: increased staffing on your internal payroll teams; contracting with a back-up payroll vendor in the event there are issues with the primary vendor; and identifying alternative means of financing payroll in the event of financial institution failure. Emergency plans need to be employer-specific, and appropriately balance the risk with the cost of such plans.
In some states, the inability to timely pay all wages owed can result in potential liability for penalties. For example, in California, a delayed payment may result in a violation of Labor Code §§ 204 and 210, which can lead to penalties of $100 or more per employee, per pay period where there is a late payment.
Inability to Pay — Furloughs & Layoffs
Employers that anticipate they may not be able to pay employees should consider immediate furloughs or other downsizing options. It is very risky (including from an individual liability standpoint in California and some other states) to allow employees to continue working if they end up not being paid.
For exempt employees, if any work has been performed during the workweek, the employee needs to be paid for the whole workweek (unless they are terminated and it is a partial final workweek, in which case pay can be prorated). In the event of a furlough, employees should be notified as soon as possible and told that they cannot work. If the workweek has already begun, it may be lower risk to tell the employees to stop working even if it is mid-workweek. Whether or not final pay is required at the time of furlough is a matter of state law, and is still in flux for many jurisdictions. For example, in California, the DLSE has taken the position – without direct approval from any state or federal appellate court – that any furlough without a specific return date within the pay period (and potentially within 10 days) requires cash out of final pay, although the issue is currently on appeal with the Ninth Circuit. In any event, employers must pay for all work performed prior to notice of the furlough.
In the event of layoffs, final pay is due. In California, waiting time penalties will begin to accrue at the final rate of pay for up to 30 days post-termination. Here, as with furloughed employees, employers must pay for all work performed prior to notice of the layoff.
Independent Contractor Payment Issues
If your workforce includes independent contractors, the law provides less protection to independent contractors than to employees, and generally, the terms of the contract between the company and the independent contractor will govern wage payments. In the event of crisis, we recommend working with these individuals in good faith to negotiate new pay dates or methods, if possible.
There are many state-specific considerations at play related to expectations for timing of payment, what payment is required in the event of furlough or layoffs, what penalties can be assessed, and against who (the employer or individuals as well), and more. For example, some states require final pay in the event of furlough, even though there is an expectation and understanding that those employees will return to the workforce at a later date. Some states charge hefty penalties for even the slightest delay in wage payment. California may even permit individual liability for directors, officers, managing agents and owners if they “cause” violations of any provision of the Labor Code or wage orders “regulating minimum wages or hours and days of work.” There may also be attempts by impacted employees to “pierce the corporate veil” to recover unpaid wages or other damages for alleged wrongs.
Indemnification Agreements for Depositors
In the event your company is affected by an inability to pay wages timely, or in an accurate manner, consider creating an indemnification agreement for your depositors.
While it may not be all doom and gloom in the short term, it’s always a good idea to prepare your team for a payroll crisis. We promise you’ll be glad you did.