Failed Bank Clients Risk ‘Draconian’ Fines if They Miss Payroll

Businesses with funds tied up in the recently failed Silicon Valley Bank wrestled over the weekend with the question of how to pay their employees, plus the risk of state and federal fines for late wage payments.

But fears that companies’ bank deposits wouldn’t be accessible plus ongoing uncertainty about financial markets serve as “a wakeup call” for businesses to have contingency plans for when they can’t make payroll on time, said Kathleen Caminiti, an employment lawyer at Fisher & Phillips LLP in New Jersey and New York. These could include plans for temporary furloughs when needed, or for issuing paper checks if the problem is a technology glitch instead of a lack of accessible cash, she said.

The immediate cash crisis at venture capital-backed technology companies was largely averted Sunday night, when federal regulators announced a plan that would give Silicon Valley Bank depositors access to their money starting Monday. The plan also covered deposits in Signature Bank, which New York banking regulators shut down on Sunday.

“Looking at the liquidity crisis that loomed over the weekend, employers were really between a rock and a hard place,” Caminiti said. “They might not have had access to their funds, but they may have still been exposed to significant damages and penalties, as well as the potential for personal liability” for company executives.

The penalties for unpaid or late wages vary widely but can be “draconian and dramatic” in a handful of states, she said.

Among them, Massachusetts and New Jersey businesses can owe damages worth triple the amount of wages in certain instances. California imposes smaller civil penalties for unpaid or late wages, but lawsuits brought under the state’s Private Attorney General Act add to the legal risks for employers there.

California regulators signaled in an email to Littler Mendelson P.C. attorneys they wouldn’t pursue late payments related to the Silicon Valley Bank failure as “willful” violations, and that the state agency would aim to resolve related PAGA claims outside of litigation. The Littler attorneys had written to the governors of all 50 states on March 10, urging them to waive penalties for late wage payments caused by the bank failure.

“Especially in light of the significant uncertainty, these are prudent steps to mitigate the impacts on companies that are operating in good faith and their employees,” Lisa Powell, general counsel for the California Labor and Workforce Development Agency, wrote to the attorneys, who shared the response with Bloomberg Law. “As noted, this approach will focus on companies impacted by the closure, and it is important to emphasize that this is not an invitation for companies that have access to funds to make payroll to delay those payments.”

Federal Penalties

Federal wage and hour law doesn’t outline an explicit timeline for when payment is due, but various courts and the US Department of Labor have interpreted a missed paycheck as a violation of the Fair Labor Standards Act.

“Wages required by the FLSA are due on the regular payday for the pay period covered,” DOL’s FLSA guide states.

For example, the US Supreme Court in 1945 said in Brooklyn Savings Bank v. O’Neil that the FLSA “constitutes a Congressional recognition that 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 wellbeing of workers.’”

In another example, a federal court ruled in 2014 that the federal government violated the FLSA by paying employees who worked through the 2013 government shutdown two weeks late.

“The FLSA requires—and the Supreme Court has recognized approvingly—that an employee receive on time payment for work performed,” Judge Patricia E. Campbell-Smith wrote in the 2014 ruling. ‘‘The court understands such timeliness to mean that an employer pays an employee on the regularly scheduled paydays.’’

An employer also can face liquidated damages for an FLSA violation, unless it can prove it “acted in good faith” or had “a reasonable belief that it was complying with the FLSA.” In the government’s case, while a federal court initially ordered the government to pay the 2013 shutdown employees liquidated damages in 2017, a 2022 appeals court ruling reversed after determining the government also had to comply with the Antideficiency Act, which bars the government from spending money when it’s not appropriated.

Leniency Possible, Not Assured

States also vary in how they define a late paycheck, with some requiring payment a certain number of days after a pay period ends and others not setting a specific timeline, said Noah A. Finkel, an employment lawyer with Seyfarth Shaw LLP in Chicago.

Employers would have a strong case for arguing state regulators should show leniency in a situation where bank deposits became temporarily inaccessible, perhaps by assessing lesser penalties, Finkel said.

“This would certainly seem to be a situation where a violation would not be willful,” he said.

It would be a different story for businesses that know they don’t have the funds to pay workers and ask them to continue working anyway, Finkel said. In that case, employers likely would have to furlough employees until funds became available again or else face potentially steep penalties for wage violations.

But employers in states with especially aggressive enforcement—Massachusetts in particular—can’t count on relief based on a good-faith effort to pay their workers. Massachusetts imposes treble damages on unpaid and late wages, “for being even a minute late,” Finkel said.

Even beyond Massachusetts, employers can’t be sure whether a late wage payment would be shown leniency because of factors beyond the company’s control, Caminiti said, adding that the standard for a “willful” violation doesn’t require malice.

“There may have been courts that would give companies a break under these emergency circumstances, but it’s not entirely clear,” she said. “The legislatures and the courts recognize that people’s weekly paycheck is essential, and some of the law is built around making sure that they receive that.”