From time to time, we hear from employers that ask us about the consequence of delaying payroll because of cash flow. The situation is one that I faced over the years in startup businesses, and even a few established ones: the company temporarily runs short of cash because of an unexpected expense or because of a delay in receiving funds from a customer, a bank, or a government agency. When I was much younger, I worked for a restaurant where the employees got together on Fridays and discussed who needed their paychecks most, since we knew that some of them would bounce and have to be replaced with cash or a new check the next week. We always got paid (and even had overdraft fees and interest covered, if need be), but instead of on Friday, we sometimes had to wait a few days or even a week, when cash flow picked up. What would have happened if one of my coworkers had claimed that the late paychecks violated the FLSA or state law and demanded their money?
Late Wage Payments Violate the FLSA, Too
If you have never confronted this situation in your business, or even if you have, you might be surprised to learn that under the FLSA, a late payment is no different than no payment at all! My coworkers would have had a solid claim for damages. At the end of July, no less than the federal government learned this lesson.
A group of nonexempt federal employee plaintiffs (along with a few exempt employees, whose claims were dismissed) who were required to work without pay during the government shutdown of October 2013 claimed violations of the FLSA’s minimum wage and overtime provisions. Although these “excepted employees” performed their normal duties during the shutdown, their agencies did not pay them on their regularly scheduled paydays for the entire pay period. Instead, due to the shutdown, their paychecks were short approximately one weeks’ pay. Congress made good on the check, paying all of the employees for work they performed during the shutdown. However, Congress didn’t allocate those funds until after the shutdown, meaning those checks came two weeks late. A decision by the U.S. Court of Federal Claims found that the nonexempt federal employees had plausibly alleged violations of the FLSA.
No Harm, No Foul is Not a Defense
Obviously, you must pay employees for all hours they work. However, the court’s decision in the government shutdown case demonstrates that the “no harm, no foul” rule does not apply to the FLSA. Under the FLSA, if an employer’s failure to pay wages is “willful” (voluntary and intentional, not just negligent), then an employee can seek “liquidated” damages in an amount equal to the wages that were not paid. Yes, that means the FLSA would require you to cut a second payroll check to the employee to cover the statutory damages. An employee’s burden in showing willfulness is not difficult here. Courts essentially presume that a violation was willful unless an employer can demonstrate otherwise. In my example above, and in the examples we hear about periodically from clients, delaying payroll is a deliberate business decision. That makes it relatively easy to conclude the decision was intentional, not an error or a good faith attempt to comply with the FLSA. Even if you can argue that the cash flow problems stemmed from a mistake, this does not change the deliberateness of the decision to delay payroll.
In the Martin case linked above, the federal government tried this defense, arguing that the court should adopt a “totality of circumstances” approach and excuse the late payment. The government argued that Congress had imposed legal constraints on paying these wages in the Anti-Deficiency Act, which prohibits the government from paying employees when appropriated funds are not available. The agencies also pointed to the brevity of the delay (less than two weeks), the fact that the government paid employees immediately after Congress appropriated the money, and that employees knew that they would receive wages as soon as the government reopened. The agencies even argued that their decision not to pay wages was involuntary, not willful. Astute readers of statutory language might even point out that, unlike many state laws, neither the FLSA nor its enabling regulations specify a timeline for paying wages.
The federal court rejected these arguments, citing a clear statement from the Supreme Court’s 1943 Brooklyn Savings Bank v. O’Neil decision. Observing that the FLSA’s minimum wage provision requires “on-time” payment, the Supreme Court held that the FLSA’s liquidated damages provision “constitutes a Congressional recognition that [the] failure to pay the statutory minimum on time may be so detrimental to maintenance of the minimum standard of living ‘necessary for health, efficiency, and general well-being of workers’ and to the free flow of commerce, that double payment must be made in the event of delay in order to insure restoration of the worker to that minimum standard of wellbeing.” Applying this mandate, courts since that decision have almost universally held that a FLSA violation occurs on the date that an employer fails to pay workers on their regularly scheduled paydays.
The O’Neil court also explained that the FLSA’s liquidated damages are “compensation for the retention of a workman’s pay which might result in damages too obscure and difficult of proof for estimate.” In other words, in a late payment situation, an employee is not required to show that the delay actually caused some harm. We haven’t even touched on the potential state law issues that you might encounter, particularly if you already pay employees in arrears, but I will leave that for a future post.
Suffice to say, some of you might think this is a harsh result. But, go back to my anecdote. Unlike the restaurant owner, my coworkers and I were left to decide who could get by for a few days without any money. The FLSA is designed to protect against exactly these kinds of abuses. For me at the time, the few days’ delay was nothing more than a minor inconvenience, but for others, it meant not putting food on the table, being late on rent, or other serious and immediate adverse consequences.