Missing a paycheck because of cash flow violates the FLSA
With the current government shutdown, many employees have been furloughed. Others have been described as “essential” and are required to work for no pay, with the promise of getting all monies owed them when a new budget is authorized. It has happened in the past, as described below, but this time it is going to carry on for a longer period of time. The federal government is subject to the requirements of the Fair Labor Standards Act. Why don’t they get in trouble for not paying employees during the shutdown? Well, for one thing, the frequency on which employees get paid is a state-controlled issue, and those state requirements vary. The Feds are not controlled by any one state, thus there is no governing regulation for frequency of pay. The employees can sue the federal government, as they did in the shutdown, and get back pay and penalties.
Private companies do NOT have the same leeway as the federal government. Missing a paycheck has more repercussions for the private sector than it does for the federal government, as outlined below in this post which appeared in 2014 during the last shutdown. If a private employer misses paying employees the must answer to the IRS, the USDOL, and state agencies. I would try to avoid it if possible.
Cash flow can sometimes be problematic to small businesses. As a result, an owner may be tempted to pay employees late. A word of warning, don’t!
Violation of the FLSA
The Fair Labor Standards Act (FLSA), also known as the Wage & Hour law, requires that employees get paid for the time they work. Occasionally, however, cash flow may be such that there is just not enough money in the bank at the time payday comes. I have known owners who then tell their employees that they will not be getting a paycheck but it will be made up to them the following week. Some employees can handle this but others cannot. So many, including the company and the employees, end up in dire straits.
According to Doug Haas, an attorney with Franczek Radelet P.C., under the FLSA, a late payment is no different than no payment at all! Haas further says “Under the FLSA, if an employer’s failure to pay wages is ‘willful’ (voluntary and intentional, not just negligent), then an employee can seek ‘liquidated’ damages in an amount equal to the wages that were not paid. Yes, that means the FLSA would require you to cut a second payroll check to the employee to cover the statutory damages. An employee’s burden in showing willfulness is not difficult here. Courts essentially presume that a violation was willful unless an employer can demonstrate otherwise.” Delaying a paycheck is a deliberate business decision so it fulfills the requirement for “willful” without any difficulty.
The courts, including the U.S. Supreme Court, have ruled that employees are entitled to damages without even having to prove they were caused difficulty by missing a paycheck. State regulations may be even harsher, especially if the missed paychecks put employees in arrears with their obligations. It can be a major mess.
A possible solution
There is a possible solution to this problem. The FLSA allows an employer the ability to drop someone’s wages to minimum wage. With this in mind, a business would be better off in trying to maintain giving non-exempt employees their paycheck but reduce the amount to minimum wage. Hopefully, there would be enough cash available to cover that amount. The missed wages could then be made up when the cash returns.
With exempt employees, it is a bit more problematic. Reducing them $455 per week would meet the exemption standard, but if you reduce them to $7.25 per hour then you may be stripping them of their exemption for that time period and them may owe them overtime for that pay period if any is worked. Small business owners are much better off taking the hit themselves rather than skipping paychecks. A line-of-credit to borrow these amounts is also a possible solution, but as we saw during the economic downturn, many businesses had their lines-of-credit suspended, thus providing no outlet.
The Lesson
The lesson in this is that cash flow is critical. Looking ahead and anticipating low cash flow can be critical in avoiding missing a paycheck. To avoid fines and penalties and the costs of a lawsuit do whatever you can do to avoid not paying people late.
By the way, it is not only small businesses that have run into this problem. Haas’ article Under the FLSA, a Day Late is a Dollar Short is actually about the Federal Government and its cash flow issues during the furlough period due to a lack of a budget. Those employees that got late paychecks were not happy and they sued and won.
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