What is My Legal Obligation to Pay Employees?

What Happens If You Don't Pay Employees

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What is my legal obligation to pay employees? What happens if I don't pay them?

Times are tough for many companies, and when cash is short it is tempting to try to save money by delaying payment to employees or not paying terminated employees. But paying employees is one of your top legal obligations. If you have employees, you must pay them. 

This article discusses

  • laws relating to paying employees,
  • how to deal with wage complaints, and
  • how bankruptcy of your company affects your responsibility to pay employees. 

 

Attorney Michael Helfand discusses the legal obligations of employers and the repercussions if employees are not paid in a timely manner.

What's the law regarding paying employees? 

Employers are legally obligated to pay their employees. Most businesses are affected by both state and federal (Fair Labor Standards Act or FLSA) laws regarding pay. These laws set the minimum wage, explain when employees must be paid, establish which employers must pay overtime and which employees are entitled to overtime, etc.

Employee Wage Complaints

If an employee has a wages complaint, whether it’s for regular pay, overtime wages, or vacation pay, they have the right to contact their state employment agency. This often results in an investigation by the employment agency, and may lead to a lawsuit against the employer or a loss of a business license.

Consequences include not only payment of back pay owed, but may include fines and penalties as well.

What Employers Should Do About Wage Complaints

Employers can protect themselves by keeping good time records, taking wage disputes seriously and attempting to solve a dispute with the employee. If there is a dispute about part of an employee’s wages – such as overtime, or an extra day worked – the employer is still expected to pay the undisputed portion when it’s due.

Common Pitfalls in Paying Employees

A few things you might not know about paying employees:

  • Withholding Without Consent. An employer cannot withhold a portion of an employee’s wages without their consent, except for withholdings required by law (FICA taxes, for example)
  • Withholding Pay as Punishment. An employer cannot withhold pay as punishment – if an employee violates company policy and leaves on bad terms, they are still owed their full paycheck;
  • Last Paycheck. An employee’s last paycheck is generally owed on or before the next regular pay day; even if overtime was unapproved, it still must be paid in most cases.

More About Legal Remedies Against Employers

The Department of Labor has provisions that allow employees to bring a lawsuit to recover back wages owed, an employee may bring a private lawsuit, and the Secretary of Labor may obtain an injunction to restrain an employer from violating the provisions of the Fair Labor Standards Act. 

States also have provisions to bring lawsuits and obtain injunctions.

 

This portion is not by Mr. Helfand: 

How does bankruptcy affect my responsibility to pay employees? 

Just because your company has declared bankruptcy, it doesn't mean you don't have a continuing responsibility to pay employees, whether your business continues during the bankruptcy or it is closed. You will be directed by a bankruptcy trustee as to how to pay employees, based on the type of bankruptcy. 

If your company is filing Chapter 11 reorganization, your business will continue, which means you must continue to pay employees. You will be put under the administrative direction of a bankruptcy trustee, who will include employee pay as one of the items that must be paid if the business is to continue. 

If your company is filing Chapter 7 liquidationthe amounts owed to employees will be prioritized by the bankruptcy trustee. Secured debt  (backed by collateral) gets the highest priority in paying back creditors. Payments to employees are considered unsecured debt, but they are typically given a high priority for repayment. 

You may also find this article helpful: How Employees and Contract Workers can Complain and Sue for Nonpayment.

 

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