Together we navigated operational challenges caused by the pandemic, and together we will weather this. What follows is information and practical advice for employers concerned with satisfying their payroll obligations in the near term in the face of their bank falling into receivership.
- Identify the “universe” of employment-related expenses. This will include payroll, benefits, bonus and commission comp, insurance, and severance obligations.
- Understand that liability for unpaid wages can be significant. For example, liability in California includes:
- Back payment of any unpaid wage amounts that employees prove they were legally entitled to.
- Interest of up to 10% of the unpaid wages.
- Penalties for late payment of wages equal to: (i) $100 for the first violation; and (ii) for each subsequent violation, $200 plus 25% of the amount unlawfully withheld. Penalties may apply for each pay period that wages remain unpaid.
- If any employees leave the company after the payday date, the company can be liable for waiting time penalties for late payment of final wages. Waiting time penalties are equal to 1 day’s wages for each day an employee’s final wages are unpaid, up to a maximum penalty of 30 days’ wages.
- Companies may be required to pay employees’ attorney’s fees if the employees prevail in litigation.
- Criminal liability for wage theft if the act is “intentional.” Felony cases are punishable by up to 3 years in prison.
- Immediate pay reductions could reduce the amount owed. Companies can reduce salary and benefits without consent so long as (1) no employment contract or CBA states otherwise (e.g., no change in pay can be made without employee consent or union collective bargaining, (2) the change is only made prospectively (i.e., employees are not deprived of earned wages), and (3) they comply with applicable minimum pay requirement for the employee’s job category, as follows:
- Non-Exempt Employees: The reduction in pay cannot put the employees below (the higher of) federal or state/local minimum wage.
- Exempt Employees: The reduction in pay should not jeopardize the exempt employees’ exempt status. To avoid the loss of exempt status, the salary reduction should not bring employees below the applicable exempt “salary basis” threshold under both federal law and applicable state law. For example, the minimum salary for “white collar” exemptions is $684 per week / $35,568 per year under federal law, but $64,48054,080 per year in California for all employers as of January 1, 2023 with 26+ employees, and $58,500 for employers in New York City with 11+ employees (slightly lower thresholds apply in other counties in the state). Massachusetts and Texas currently follow the federal salary thresholds.
- That said, if a company has employees on visas, the company will need to assess whether a pay reduction is permissible given the employee’s visa status.
- Furloughs may provide short term relief. In the US, employers are free to place employees on furlough (or unpaid leave) without the employees’ consent (unless the furloughed employees are subject to a collective bargaining agreement or employment contract that requires specific steps before furlough can be achieved). However, employers should consider the issues associated with furloughs before pursuing them:
- If the furlough does not apply to everyone and select employees continue working, the selection process should be neutral and non-discriminatory. This means the selection process should not target specific groups of people based on race, sex, age, disability, religion, etc.
- Non-exempt employees who are furloughed are not owed wages; exempt employees must be paid their full weekly salary for any week in which they work (so furloughs should be in full week increments).
- Employees may be able to use vacation / PTO. Companies may also be able to require employees to use accrued and unused vacation/PTO. The California Labor Commissioner has previously taken the position that California employers may only force employees to use accrued and unused vacation if the employer provides notice of at least one full fiscal quarter OR ninety (90) days, whichever is greater, in advance of the forced vacation; however, this guidance has recently been removed from the DLSE website.
- Furloughs may trigger obligations under the state or federal WARN Acts if the headcount numbers are triggered, particularly, if the furlough is longer than two weeks.
- Furloughs may be considered terminations of employment and trigger final pay requirements under state law. In California, this can occur with furloughs as short as 10 days.
- Timing
- The California Division of Labor Standards Enforcement (DLSE) previously issued two somewhat conflicting opinion letters on the length of time of the shutdown. One provides that the shutdown should not exceed 10 days and there should be a definite date for return to work, while another letter states that employees should return to work within the same pay period to avoid triggering a termination event which required the employer to pay final wages. Thus, if a furlough extends beyond 10 days and there is no definite return date, the DLSE is likely to view such a furlough as triggering final pay requirements.
- For California employees, in case of a shutdown of two weeks or less, the employer must complete form DE 2063 available here. This form must be completed and issued to the affected employees by the fifth day after the end of the company’s payroll week in which the shutdown occurs. The affected employees must submit completed forms to the EDD no later than 28 days after they are issued by the employer. Instructions for completing the form are available here.
- Short furloughs (e.g., 1 week) generally do not impact employee participation in benefit plans, but longer furloughs might because extended furloughs might cause the employees to fall below the minimum hours needed to be considered eligible for company-paid plans. It is important to consider the eligibility requirements for each plan. Many benefit plans, especially health benefit plans, are limited to full time employees or employees who work more than a certain number of hours each week, such as 35 hours per week or more.
- If the employees are furloughed long-term, they may no longer meet the minimum hours requirements in the company’s plans. Also, a cessation in service under COBRA may be triggered by longer furloughs. In that case, employees will need to get COBRA notices and may continue their healthcare coverage by paying the premiums themselves. 401k plans also have a minimum hours requirement (e.g., 1,000 hours). It may be possible to get around this with a partial workweek furlough, or by changing the benefits policy to count furloughed hours as hours worked. The company should check with its benefits providers for options. Companies should also consider impact on equity vesting under their equity plans.
- Consider employees on company-sponsored visas. If the company has employees on a visa, the visa status may impact their right to remain in the US. Furlough without pay is illegal for certain visa categories (e.g., H-1B) so the company would have to request that employees take vacation, if any, and pay them the rest.
- Review issues with delaying non-salary payments. Employers may be tempted to delay non-salary payments, such as bonuses and commissions, to address short-term payroll issues. While employers can modify incentive compensation plans prospectively, any incentive compensation that has already been earned must generally be paid out when promised in order to comply with applicable payday laws. In addition, delaying certain bonus payments may have adverse tax consequences under Section 409A of the Internal Revenue Code. If 2022 bonuses are paid after March 15, and those bonuses were no longer subject to forfeiture after December 31, 2022, this could amount to a violation of the short-term deferral rule and trigger adverse tax consequences, including an additional tax equal to 20% of the improperly deferred amount (i.e., 20% of the gross amount of the bonus) under federal law. Practically speaking, however, in this unforeseeable situation, an exception to the short-term deferral rule may apply, for as long as an employer can demonstrate that it was administratively impracticable to make payment or that making payment would have jeopardized its ability to continue as a going concern.
- Understand impact on international subsidiaries and employees. If there are challenges with meeting payroll schedules internationally, consider when payments must be due. For many international jurisdictions, wages are paid monthly at the end of the month so there may be time to secure funds.
Please contact your Baker McKenzie employment lawyer for assistance navigating this rapidly unfolding situation.