What Is My Legal Obligation to Pay Employees?
What Happens If You Don't Pay Employees
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 as an employer. If you have employees, you must pay them.
This article discusses:
- Laws relating to paying employees
- How to deal with wage complaints
- How the bankruptcy of your company affects your responsibility to pay employees
What's the Law Regarding Paying Employees?
Employers are legally obligated to pay their employees. Most businesses are affected by both state and federal laws regarding pay.
For example, the FLSA says that an employer having cash flow problems and worried about meeting payroll must pay non-exempt (hourly) employees their full wage and any overtime due on their regularly scheduled payday. If the employer doesn't pay these employees, it violates the FLSA.
In another example, if an employer cuts payments to a salaried exempt employee, the Department of Labor's regulations mean the employee is no longer exempt and the employee must be paid at least minimum wage plus overtime.
State laws on paying employees may be different and more strict than federal laws. In these cases, you must comply with the law that gives the greater benefit to employees. For example, if a state's minimum wage law is higher than the federal minimum wage, you must pay employees working in that state the higher amount.
Check with your state's labor office to find out the requirements for paying employees and for giving employees their last paycheck on termination.
No Punishment for Employee Actions
It's a violation of federal law to retaliate against an employee who files a pay claim, an internal complaint, or a whistleblower complaint against a company. An employer may not retaliate by non-payment, discharge, or any form of discrimination.
It's also against the law (Title III of the Consumer Credit Protection Act) to discharge an employee whose earnings have been garnished for any one debt. It also limits the amount of employee pay that may be garnished in any one week.
Common Pay Violations
A few things you might not know about paying employees:
Withholding and Deducting 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). Make sure you have a record of employee agreement for all pay non-required deductions in case of an audit.
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.
Paying Below Minimum Wage. You can't deduct amounts from employee wages for such items as shortages, employer-required uniforms, and tools of the trade if they reduce the employee's wages below the minimum wage. This doesn't apply to mandated withholding for FICA taxes (Social Security/Medicare) and income taxes.
Employee Paycheck Laws
Federal laws don't require employers to give former employees their final paychecks immediately. But each state has laws stating when employees must receive their final paycheck. Some of these state laws differ depending on whether the employee is fired or leaves the company.
Missouri, for example, required employers to pay an employee who was fired "all wages due at the time of dismissal."
Vermont law says the employee must be paid within 72 hours from the time of discharge, while an employee who quits must be paid on the last regular payday, or if no regular payday, on the following Friday.
Paying Tipped Employees
Employee tips are the property of the employee. Federal law requires you to pay tipped employees at least the federal minimum wage (currently $7.25 an hour), even if you use a tip pool.
Some states have more generous rules about paying tipped employees. For example, California law says that an employer cannot use an employee's tips as a credit towards the minimum wage.
Legal Remedies Against Employers
There are several ways the federal government can act against FLSA violations:
- The Secretary of Labor may bring suit for back wages or for an injunction against an employer.
- Employees may file a lawsuit if they have been discriminated against or discharged for filing complaints or giving information against an employer.
- An employee may file suit to recover back wages (but employees of state governments can't file suits against state employers)
- Civil monetary penalties may be assessed against an employer for repeat and/or willful violations of FLSA requirements
- Employers willfully violating the law may also face criminal penalties, including fines and imprisonment.
Business Bankruptcy and Pay Responsibilities
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 employees receive high priority status and employee creditors are entitled to receive cash equal to the amount of their claims (with some limits). 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 your company is filing Chapter 7 liquidation, the 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.
How to Respond to Employee Wage Complaints
The most important thing you can do to protect your business from wage complaints is to keep good records of the amounts paid to employees. If your business receives a complaint about non-payment, this is the first thing a state or federal official will ask for. Other tips:
- If the complaint is from one employee, take it seriously. Deal with it immediately before the employee gets more upset.
- Agree to sit down with the employee and show records of payments. The employee has a right to see these records.
If there is a dispute about part of an employee’s wages, you as the employer are still expected to pay the undisputed portion when it’s due. For example, if an employee says they are owed overtime, don't stop paying the regular part of their pay while the dispute is ongoing.
If the complaint is from more than one employee, it will probably come directly from a federal or state agency. In this case, the employees as a group have filed the complaint. If the complaint is part of a class-action lawsuit, it might come from an attorney representing the employees as a group. Cooperate fully, share records, and, most important, don't lie.
U.S. Department of Labor. "Fact Sheet #70 FAQ's Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues." Q #1. Accessed Mar. 3, 2020.
U.S. Department of Labor. "Fact Sheet #70 FAQ's Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues." Q #4. Accessed Mar. 3, 2020.
U.S. Department of Labor. "Digital Reference Guide to the Fair Labor Standards Act (FLSA)." Retaliation Prohibited. Page 21. Accessed Mar. 4, 2020.
U.S. Department of Labor. "Garnishment." Accessed Mar. 4, 2020.
U.S. Department of Labor. "Handy Reference Guide to the Fair Labor Standards Act." Basic Wage Standards. Accessed Mar. 4, 2020.
U.S. Department of Labor. "Last Paycheck." Accessed Mar. 4, 2020.
Missouri Department of Labor. "Discharged Employees and Final Wages." Accessed Mar. 3, 2020.
Vermont Department of Labor. "A Summary of Vermont Wage and Hour Laws." Pay Day Requirements. Page 5. Accessed Mar. 4, 2020.
u.S. Department of Labor. "Fact Sheet #15. Tipped Employees Under the Fair Labor Standards Act (FLSA)." Accessed Mar. 4, 2020.
California Dept. of Industrial Relations. "Tips and gratuities." Question 8. Accessed Mar. 4, 2020.
U.S. Department of Labor. "Back Pay." Accessed Mar. 4, 2020.
U.S. Department of Labor. "Fact Sheet #70 FAQ's Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues." Q #7. Accessed Mar. 3, 2020.
Congressional Research Service.Lewis, Kevin M. "Making it a Priority: What Happens to Employee Claims When a Business Declares Bankruptcy?" April 16, 2019. Accessed Mar. 3, 2020.