March 15, 2023
In the wake of Silvergate’s collapse, Silicon Valley Bank entering receivership and another bank following in SVB’s footsteps, startups and other companies affected by these events are struggling to manage their payroll and other obligations while credit facilities are frozen. With Janet Yellen’s announcement that depositors will be fully protected, most businesses hope to avoid the brunt of this banking crisis. But some still may face tough decisions, like whether to furlough employees. Others have concerns about criminal liability for continuing to have employees work when the employer already knows it cannot make payroll.
If at all possible, employers should continue to pay their employees for all hours already worked when payment comes due. Bridge loans, capital raises and new long-term credit facilities should be explored to avoid defaulting on payment obligations. Nuances in state law will govern whether workers are independent contractors, or non-exempt or exempt employees. State laws generally provide fewer protections for independent contractors than for employees. Accordingly, there may be room to negotiate the terms of contracts with independent contractors to adjust when payments are due.
Federal Law Considerations for Employers
Under the Fair Labor Standards Act (FLSA), employers must pay employees for all hours worked and maintain accurate records for hours worked. Employers must determine whether a given employee is “exempt” or “non-exempt” from the FLSA’s coverage. Employees are generally considered exempt if they: (1) are paid a stable flat weekly salary above a certain minimum; and (2) work in an administrative, professional, executive, computer or outside sales role. While most states follow the FLSA thresholds regarding whether an employee is exempt or non-exempt, California and New York tend to offer greater employee rights than the FLSA provides nationwide.
State Law Considerations for Employers
In addition to the FLSA, state law also governs how often and when employees must be paid. For example, New York’s Labor Law Section 191 mandates that employers pay non-exempt clerical workers no less frequently than semimonthly. These New York State FAQs detail the minimum timing requirements employers must meet to pay non-exempt workers, including weekly pay for manual workers.
Note that New York law does not impose the same requirements on employers when it comes to exempt employees who: (1) meet the professional, administrative or executive duties test; and (2) have a weekly salary of at least $1,125. While New York law requires employers to pay non-exempt employees semimonthly or even weekly, exempt employees may be paid monthly. Adding another layer of complexity, under the New York Wage Theft Prevention Act, employers must give employees notice at least seven days before changing the timing of wage payments. This is true for both exempt and non-exempt employees. When a week’s notice is simply not feasible, employers still should provide notice as far in advance as possible and may face fines and penalties for failure to comply with the law.
To take another important example, California Labor Code Section 204 requires that employers pay non-exempt employees no less frequently than every two weeks on specific days designated in advance as paydays. Similar to New York, California also requires employers to provide advance notice of the designated dates employees are to be paid and should provide employees with notice ahead of any changes that may be made. Executive, administrative and professional employees of FLSA-covered employers may, however, be paid monthly.
Worst-Case Scenario: State Criminal Penalties
In addition to the risk of possible civil actions brought by impacted employees, state attorneys general may enforce statutes criminalizing an employer’s intentional failure to timely pay employees. But where employers have no choice but to violate state labor and employment law due to these unforeseen circumstances, prosecutors may exercise their discretion and refuse to bring criminal cases. Other state agencies also may act to ameliorate the risk of liability. For example, the California Employment Development Department has put in place a procedure to waive penalties for late payroll tax for those who did business with Silicon Valley Bank.
How to Navigate This Environment
Every employer’s situation will be unique, but some general takeaways may be broadly applicable. As a first resort, companies should try to access short-term capital to make payroll, whether through bridge loans or other sources. For exempt employees, check state law to see if paydays can be moved to provide additional runway. Consider splitting payroll into non-exempt and exempt categories, and postponing payments to exempt employees (with adequate notice) to gain extra time to secure financing before all payroll obligations come due.