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Companies Missing Payroll Is Next Front in Virus Enforcement (1)

April 24, 2020, 6:02 PMUpdated: April 24, 2020, 9:33 PM

Federal wage enforcers are responding to a growing number of complaints from workers who say they’re being stiffed on their paychecks entirely, despite logging regular hours during the pandemic.

The head of the Labor Department’s Wage and Hour Division said the agency is addressing the emerging pattern of workers alleging their employers don’t have enough cash on hand to pay them.

“We are also remaining faithful to other enforcement we need to do, particularly in the realm of missed payroll and reports that employers have failed to pay their employees because of cash-flow issues,” WHD Administrator Cheryl Stanton told reporters Thursday.

Stanton said the agency’s response to the wave of complaints comes on top of its efforts to police new virus-related paid sick- and family-leave requirements. The agency has received “tens of thousands of calls” in recent weeks from employees and employers citing wage-hour issues and other matters connected to the widening strain the coronavirus has placed on the economy, she said.

The agency would not say how many missed-payroll complaints it is investigating, citing a policy of not commenting on open probes. A spokeswoman also declined to explain how much leniency it will afford businesses that miss payroll while they await government aid. President Donald Trump on Friday signed a new law that replenishes a small-business aid program.

Missed-payroll complaints, which tend to crop up as economic downturns squeeze companies, are the latest example of the pandemic’s staggering effects on workers and companies alike.

The economic ramifications also create the potential for private litigation, including class actions, in addition to enforcement moves by the agency, such as investigations alleging back pay and damages owed.

At least one company is already facing litigation over delinquent paychecks. Hair Cuttery stylists sued the salon company’s owners in New Jersey and Florida this month, alleging that their employer refused to pay them for their work in the days leading up to the chain’s coronavirus-related closures.

Missed Final Paycheck

One lawyer told Bloomberg Law that the first wave of missed payroll complaints likely involves employers who lay off workers and then fail to cut their final paycheck.

“I think what’s more common is individuals having their employment terminated before the company misses payroll, and so it’s happening very abruptly,” said Cara Greene, a partner at plaintiff-side firm Outten & Golden LLP in New York. “I’m having clients who have gotten calls on Sunday evening when they’re supposed to be at work the next day, because the employer realizes they’re just not going to have the funds to pay them.”

Some complaints can be resolved without protracted investigations or private litigation, as businesses gradually receive federal loans that allow them to make their workers whole for the hours they’ve spent on the clock. But the federal government has struggled to efficiently disburse small business loans promised under virus-stimulus law.

Eventually, if federal assistance is unable to reach all businesses in need, private attorneys are likely to become more aggressive in seeking redress in court.

“The reality is if they’ve taken the services of employees, if they worked, they are required to pay them,” Greene said, referring to employers. “There’s no provision in the law that allows for what is essentially a loan from the employee to the employer, for working.”

Plea for Lenience

Because missing payroll is often a symptom of a company’s larger financial problems, employee back-wage complaints often wind up in bankruptcy court. Enforcement action by the DOL’s Wage and Hour Division offers an alternative, short-term path for needy workers to get delayed paychecks.

Threat of government investigation is a concern for cash-strapped businesses that may not be familiar with the Fair Labor Standards Act’s wage requirements, said Karen Harned, who heads the legal center at the National Federation of Independent Business.

“I am concerned if they start enforcing for these people who are like, ‘Oh my gosh, I didn’t even know,’ and all they’re doing is trying to do right by their employee and keep them on their payroll as long as possible,” Harned said. “I’d like to think the agency is going to be lenient on that, but we just don’t know.”

Harned said she recently asked the Wage and Hour Division to extend leniency to businesses that make a good-faith effort to comply with payroll obligations under FLSA and the new mandate to provide some workers with up to 12 weeks of paid sick- and family-leave. Liquidated damages, which amount to double the back-wages owed an employee, should be a remedy the agency reserves for employers who knowingly violate the law, Harned said.

Resolving Complaints

When federal regulators or a plaintiff’s attorney reviews a worker’s missed-payroll complaint, it’s a pretty straightforward analysis: Either the company paid on time or it didn’t. Resolving the matter is where things get tricky.

“I think the real practical question, including for the DOL, if it’s going to come in, is whether it’s just a missed payroll or whether it’s a delayed payroll,” said Allan Bloom, a partner at Proskauer Rose LLP in New York who leads the management-side firm’s national wage-and-hour practice group. “If it’s a delayed payroll and the employees end up getting everything they’re owed, just not on the right schedule, and there’s no nefarious motive, I would think the DOL—even if it had the resources to investigate—would back down if the employer showed it paid the wages.”

“If it’s really a missed payroll with no plan to pay at some point, then I think it’s a bigger problem,” Bloom added.

For instance, the agency in the past has worked with insolvent employers to set up a payment plan, including having a forensic accountant verify that the business actually needs to be on a payment plan, said Tanya Goldman, who was a senior policy adviser at DOL’s Wage and Hour Division during the Obama administration.

“If it is clear that the employer has insufficient funds to meet its payroll obligations, WHD may look at other avenues for obtaining payment, including related business entities or personal liability for individuals who may under some circumstances constitute an employer under the Fair Labor Standards Act,” said Paul DeCamp, who ran the WHD during the George W. Bush administration.

But if the employer doesn’t survive the coronavirus crisis, workers owed a final check likely have much more waiting to do. “If you’re missing payroll, there’s a crisis going on,” Bloom said. “If there’s no cash, employees are in line with everybody else. There’s creditors, there’s suppliers and vendors, landlords, the IRS.”

Sure, the DOL or a private attorney could sue, and they’d have a great case; but litigation may not be worth the effort if a company has no cash and is headed to bankruptcy court.

“Recovering money is going to be a long and difficult journey,” Bloom said.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editor responsible for this story: John Lauinger at jlauinger@bloomberglaw.com