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Considerations During A Liquidity Crisis
Mar 29, 2023 9:00:00 AM
The recent liquidity issues created by the Silicon Valley Bank closure highlights many of the concerns employers can face if they find themselves in the middle of funding challenges. Funding disruptions can come in more than one way though; banking is just one example. Below are some actions an employer might think about during a financially precarious time but they should be approached with care.
Late Payment/Non-Payment of Wages
State wage payment laws control how often employees must be paid as well as how soon they must be paid after they perform services for an employer. The federal Federal Fair Labor Standards Act (FLSA) only generally requires that an employer pay its employees "promptly."
The Internal Revenue Service (IRS) releases annual income tax withholding tables that are based on specific pay periods - weekly, biweekly, semimonthly, monthly, quarterly, semiannual, annual, and daily or miscellaneous. The vast majority of state wage payment laws require an employer to choose an IRS-sanctioned pay period for paying wages to their employees. A handful of states, however, do not give employers a choice of which pay period(s) they may use. For instance, Maryland non-exempt employees must be paid at least bi-weekly or semi-monthly. Other states require employers in certain industries to pay according to state-approved pay periods.
Not being able to access your funds to pay your employees is generally not a defense to late or non-payment of wages. Penalties under both federal and state law can be significant. In Connecticut, depending on the amount of unpaid wages, an employer may be liable for a fine of $200 to $5,000 and/or imprisonment for 30 days to five years. In addition to being liable for the unpaid wages, liquidated damages as well as attorney fees and costs for an employee that pursues a claim could also apply. Employers should do everything they can (tap into a business loan or line of credit from a financial institution, 401 (k), or credit cards as examples) to make payroll.
Cutting Hours/Cutting Pay
An employee's hours may be cut when a business is struggling, or operations need to be reduced. A full-time employee may have part-time hours for a time. For a non-exempt status employee, the employer only has to pay for hours when the employee actually works, and if there is no work, the employer can have the employee go home or not come in. Remember, the Fair Labor Standards Act (FLSA) requires that salaried exempt employees be paid a fixed weekly salary that cannot be reduced based on the quality or quantity of the employee's work.
Some employers look at cutting pay instead of or in addition to cutting hours (note: some states require advance notice of changes in pay or hours worked). Under certain circumstances, an exempt employee's salary can be reduced, but in order to be defensible, it should be on a fixed basis (i.e., Not $1000 one week, $850 the next, and $800 the week after).
Employees may be more willing to accept these measures as an alternative to losing their jobs – or their coworkers losing their jobs.
Employee Furlough/Employee Layoff
A furlough is when an employee takes unpaid or partially paid time off of work for a period of time. A furlough could be every Monday, or it could be for two weeks. Furloughing employees can be a valuable cost-saving measure for the employer during tough economic times or slow periods. It allows the employer to maintain the employee relationship, while the employee avoids unemployment. The expectation is for the employee to be called back to work. Benefits may continue because the employee is still classified as an active (non-terminated) employee, or COBRA may be applicable due to the reduction in hours. Advantages of a furlough include avoiding (or delaying) a layoff and reducing the need to re-hire.
In a layoff, employees are let go and not guaranteed return. The employee is no longer active, and employment is terminated. When employees are being laid off, an employer should review applicable company policies, contracts, and collective bargaining agreements and then compile selection criteria to determine which employee(s) will be part of the workforce reduction. If an employer is shutting down operations or has a large reduction in force the WARN Act may apply to employers of a certain size.
After an employer has selected the employees to be laid off, they should review whether terminating these individuals would discriminate or excessively affect employees in a legally protected category (i.e., If all employees selected for the layoff were females over 40).
Placing employees on furlough may allow an employer to defer costs related to final pay, such as remuneration for unused paid time off (PTO), vacation, or sick pay. And a variety of alternatives to workforce reductions could be implemented (e.g., hiring freezes, cuts to compensation and benefits) prior to resorting to downsizing measures.
In a challenging business climate, employers can be faced with complicated choices when trying to determine the best path forward for their businesses. Crisis management is an essential component of business continuity planning and something every organization needs to implement as part of its business processes. Reach out to your FrankCrum contacts as needed.
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