What if your business is in trouble and you have to cut costs? Cut overhead or lay off employees, but don't expect employees to go without getting paid. You have a legal obligation to pay employees wages due to them, and they can sue you to get paid.
Cases and Standards
Don't try to play games with these legal obligations by playing tricks with employee pay. In one case, the Sugar Plum Fairy Baking Company was sued by employees for non-payment of overtime, along with other labor law violations. The company is alleged to have paid employees in two checks. One check was for wages up to 40 hours a week, from which deductions were taken. The second check was for overtime at straight time with no deductions taken. If these charges are true, the company's practices are illegal on several counts:
- The Fair Labor Standards Act (FLSA) requires that overtime is paid over 40 hours worked in a week, at the rate of 1 1/2 times. For example, if the employee's hourly rate is $10, any hours worked over 40 in a week would be paid at $15. Some states may have variations in their overtime laws, but most require that overtime is paid at a higher rate.
- Deductions are required from all pay. This includes withholding for the employee's federal and state income taxes and the employee's portion of the FICA (Social Security) and Medicare withholding. Not deducting from the overtime checks affects the employee's taxes and understates the liability for employment taxes.
Non-Payment of Regular and Overtime Wages
In another lawsuit, in 2015, employees of Chipotle sued the company, saying they had been forced to work without pay and to work "off the clock."
Paychecks as Punishment
You are also not legally able to withhold a paycheck as punishment for employee noncompliance with rules. In a case in Oregon, an employer wanted to withhold paychecks from employees who did not sign time sheets in a timely manner. This is also a "no-no." You as the employer are responsible for tracking hours worked and paying employees on regular paydays. Employers who want to discipline employees must find a different way to do it besides withholding paychecks.
If your business declares bankruptcy and you owe money to employees, they become creditors just like others and they may not get paid all they are owed. Employees are not in the top priority class of creditors, and their wages, salaries, or commissions must have been earned within 180 days prior to the bankruptcy, to a maximum of $10,950 for each individual. So, while these payments are limited, they are still part of the bankruptcy payout.