Over the holidays, I read about a lawsuit against a now-shuttered Dallas hospital filed by a nurse who was among 150 or so employees who were told the morning that the hospital suddenly closed for good that they would not be paid because of an “unexpected funding issue.” The former head of the hospital’s management company commented in the news story that he does “expect all employees to be paid over time.” For FLSA (and Texas wage and hour law) purposes, though, that unexpected funding issue is going to get very expensive. The old “a day late and a dollar short” adage holds true in wage and hour law.
Delayed payrolls do happen from time-to-time. A Massachusetts man sued his former employer for a direct deposit that was one day late. Companies run short of cash unexpectedly because of unusual expenses or delays in receiving funds from a customer, a bank, or–in a familiar refrain for contractors in Illinois–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 at least some of them would bounce and have to be replaced with cash or a new check the next week. Unlike the nurse in the lawsuit above, we always got paid (and the owner covered any overdraft fees and interest). But, instead of Friday, we sometimes had to wait a few days or even a week for cash flow to pick up to get paid. If one of my coworkers had claimed that the late paychecks violated the FLSA or state law and demanded their money, my employer would have been in an even worse spot.
Late Wage Payments Violate the FLSA
I hope you have never encountered this issue in your business, but even if you have, you might be surprised to learn that the FLSA treats late payments exactly the same as it would no payments. Two years ago, the federal government itself got hit with FLSA claims by non-exempt employees who were required to work during the October 2013 government shutdown. During shutdowns, some non-exempt (and exempt) federal employees are required to work (“excepted employees”), but without Congressional authorization to expend money, their agencies cannot pay them. In 2013, the shutdown was long enough that agencies missed a full week of pay. When the government reopened, Congress authorized pay for the shutdown period for those who were required to work. However, that retroactive pay came two weeks late, and a decision by the U.S. Court of Federal Claims found that the nonexempt federal employees had plausibly alleged violations of the FLSA and permitted their lawsuit to continue. The court later certified a conditional nationwide class, and the government is still engaged in discovery years later.
Don’t Count on the No Harm, No Foul Defense
Obviously, you must pay employees for all hours they work. However, the court’s decision to permit the federal employees to move forward in the government shutdown case demonstrates that employers cannot count on the “no harm, no foul” defense under the FLSA. The FLSA allows affected employees to seek “liquidated” damages in an amount equal to the wages that were not paid for an employer’s “willful” failure to pay wages (voluntary and intentional, not just negligent). In the Massachusetts case mentioned above, the employer did win under a state law claim for the one-day delay, but most employer cannot count on that defense working in other cases. The employee in that case was a highly paid executive who had been terminated and had his final paycheck processed that same day. The delay in the availability of funds was due to bank direct deposit processing rules and not the employer’s willful act, and a nearly 6-figure windfall was completely inequitable under those circumstances.
In the overwhelming majority of delayed payroll situations–including the government shutdown case–the FLSA could require you to cut a second payroll check to the employee to cover the statutory “liquidated” 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 Dallas case, 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 federal employee shutdown case linked above, the federal government tried the same defense as the Massachusetts company, 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 (having worked for SSA during a brief shutdown, I can tell you that there were no such guarantees). 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.
Of course, state law might make things worse for employers issuing payroll late, particularly if you pay payroll in arrears, as most do. Unlike the FLSA, many state laws do provide for payroll deadlines, and they also often impose additional penalties beyond those available under the FLSA. An employee could collect damages up to four times: under the FLSA, and under state laws providing for damages for failing to pay the minimum wage, for failing to pay overtime, and for untimely wage payments.
Upshot for Employers
Of all the things you delay, make payroll the last one. Mistakes and issues do happen, and the best thing that you can do in those situations to maintain employee relations and cut off legal claims is to make employees whole as soon as possible. You might think that the FLSA and state laws lead to harsh results. They do. But, go back to my anecdote and the Massachusetts case. The Massachusetts employee was a highly paid executive who had his final 5-figure paycheck delayed by a few hours. There really was no harm. However, my restaurant 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, and the harsh deterrent is warranted: 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 bill–serious and immediate adverse consequences.