What Is My Legal Obligation to Pay Employees?

What Happens If You Don't Pay Employees

Employer writing a check to pay their employee.

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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
  • 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 (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.

Other federal and state laws include requirements for when employees are paid and how often. The IRS has few specific requirements for the timing of employee paychecks, but several states have laws about how often employees get paid.

How Wage Complaints Get Started

Wage complaints typically get started because an individual employee finds out that others are paid differently, that a portion of their pay isn't included (usually overtime), or a group of employees complains because they are not paid at all.

If an employee has a wage 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.

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.

NaturalHR suggests that you talk with the employee to find out what else might be on their mind. Sometimes there is some other issue that is triggering the pay complaint.

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. 

 © The Balance, 2018

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 payday; 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 U.S. 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. Injunctions require someone to start or continue doing something, so they can be used to require you to continue paying employees.

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 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.