Your business may be going through a difficult time, 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.
Keep reading to learn more about the state and federal laws relating to paying employees.
Three Pay Violations
Here are a few things you might not know about paying employees that can cause issues with federal and state employment agencies.
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.
State minimum wage rates may be higher than the federal minimum wage. In this case, your business must pay employees at least the higher state rate.
Laws Against Not Paying Employees
Employers are legally obligated to pay their employees and most businesses are affected by both state and federal laws regarding pay.
The U.S. Department of Labor's (DOL) Wage and Hour Division includes administration of the Fair Labor Standards Act (FLSA), which sets standards for minimum wages, overtime pay, recordkeeping, and youth employment. Here are two ways employers can run afoul of the FLSA:
- An employer having cash flow problems and is worried about meeting payroll must pay non-exempt (hourly) employees their full wage and any overtime due on their regularly scheduled payday.
- In another example, if an employer cuts payments to a salaried exempt employee, the DOL's regulations may 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, some states have stricter overtime pay requirements than the federal requirement of overtime after 40 hours in a work week. Employers in those states must pay overtime at the stricter rate.
Be sure you are complying with the pay laws that are of the greatest benefit to employees. Check with your state's labor office to find out its requirements for paying employees, including overtime pay, minimum wages, and last paycheck on termination.
Bankruptcy and Pay Responsibilities
Just because your company has declared bankruptcy doesn't mean you don't have a continuing legal responsibility to pay employees, whether your business continues during the bankruptcy or it is closed.
Employee claims for wages and benefits made before the bankruptcy petition are classified as "priority unsecured debt," paid after secured debt and before general unsecured debts. These claims must be made within 180 days of the bankruptcy filing and they have a dollar limit.
You will be directed by a bankruptcy trustee as to how and when to pay employees.
What Happens If I Don't Pay Employees?
There are several ways the federal government can act against FLSA violations:
- The Secretary of Labor may bring suit for back wages or file 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.
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.
Final Employee Paycheck Laws
Federal laws don't require employers to give former employees their final paychecks immediately. Each state, however, 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, requires employers to pay an employee who was fired "all wages due at the time of dismissal." Meanwhile, 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 toward the minimum wage.
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.
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 them 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 importantly, don't lie.
Frequently Asked Questions (FAQs)
How do I report a company for not paying their employees?
You can file a complaint with the Department of Labor's Wage and Hour Commission. You can also pursue a case at the state level, through your state's workforce agency. Of course, you can also get an attorney, but this means you'll have to pay.
What if an employer is in bankruptcy and isn't paying employees?
In this case, it's best to get a local attorney involved so they can present the nonpayment claim directly to the bankruptcy trustee. Bankruptcies are complicated and they can take time to resolve.