Notwithstanding the very recent good news that it appears the federal government and regulators currently have control and a plan in place to limit the impact of Silicon Valley Bank’s (SVB) and Signature Bank’s recent failures (including a pledge to back 100% of deposits), employers may still be concerned about access to liquidity. We have prepared the following FAQs to address some of the most common concerns that arose among employers for these uncertain times.
Q1. I do not have sufficient cash liquidity on hand to make payroll, what are some options for consideration?
A. First, partial payroll payments, if possible, may be considered, but are not a long-term fix. An employer may reduce its Fair Labor Standards Act (FLSA) exposure, even if not its state wage and hour law exposure, if it makes at least the minimum required payments necessary to maintain an employee as exempt, or to comply with minimum wage obligations. To this end, the minimum FLSA salary requirement for exempt status is $684 per week. If you want to reduce an employee’s salary to this level, a notice of such reduction must precede the modification; therefore, provide a written notice of the immediate reduction in salary to $684 per week (or some amount above that minimum threshold) commencing on XYZ date, and then make payments consistent with that lower obligation. Similarly, the FLSA only enforces obligations for the failure to pay someone minimum wage or owed overtime. Accordingly, you can eliminate FLSA exposure for nonexempt employees, if you are at least paying the minimum wage required in your jurisdiction for each hour worked. As with the notice to exempt employees regarding the reduction in salary, it is prudent to provide a similar notice of any hourly pay reduction to nonexempt employees. Employers should also check applicable state minimum wage laws to ensure they are paying the appropriate minimum wage based on the state where the employee works (including, possibly at the employee’s home when the employee is a telecommuter). Finally, you will need to adhere to the terms of any contracts of employment or else face a possible breach of contract lawsuit.
Second, possible rolling furloughs. Remember that if an exempt employee is furloughed, it should be for the entire workweek, not just a day or two. If an exempt employee works even one hour in a regular workweek, he or she is entitled to a full week’s salary. Employers should confirm that the employee is not able to access systems remotely through mobile devices and laptops, especially given the ease of remote work today. Remember, if the exempt employee performs any work during the week, then they must be paid the salary minimum for that week and, of course, nonexempt employees must be paid minimum wage for all hours worked. Therefore, employers should consider furloughs for nonessential employees initially before considering furloughs for others.
Third, permanent reductions-in-force. It is likely not advisable to have a permanent reduction if the employer would not have otherwise conducted a reduction but for immediate challenges associated with access to cash liquidity. In today’s labor market, a permanent layoff can quickly lead to employees moving on to other employment opportunities, a factor that can come back to bite if workers are needed later after the initial challenge is faced.
Q2. If I decide to conduct a permanent reduction-in-force, am I required to provide any sort of advance notice?
A. If the reduction is due to the sudden and unforeseen inability to access cash or lines of credit, you may not be required to provide advance notice of a permanent reduction-in-force. Under the Federal Worker Adjustment and Retraining Notice Act (WARN), as well as most (if not all) state mini-WARN laws, unforeseen circumstances can be an acceptable excuse for failing to provide the 60 days’ notice that would otherwise be required under these laws. Employers must still provide as much notice as is possible to avoid liability, but where an employer suddenly cannot access cash because it is on deposit with an institution that unpredictably had its assets frozen (such as with deposits at SVB), there is a strong argument for an exception to the WARN Act notice requirement.
Q3. If I fail to make payroll, is there any potential personal liability to individuals within the organization for such failure?
A. Generally, the FLSA and most state wage and hour laws allow for the assessment of liability on individuals who have responsibility for payroll and or the failure to make payroll occur. To this end, however, there may be some “defenses” similar to the exception rules associated with WARN and mini-WARN notice requirements. Nevertheless, the best practice in this space is to try to eliminate that exposure by making at least minimum required payments under applicable wage and hour laws. See First Option answer to FAQ #1.
Q4. I think I can come up with the funds to make payroll, but I need some more time. What should I do?
A. Almost every state has a law governing pay frequency. First, consult the law in the state where the employee works, not where the company is based. Second, if you plan to change the pay frequency to delay payment, you likely will have to give written notice to each employee. Notice requirements are detailed in many of these state laws. Third, be especially careful in the following states as they require certain categories of employees to be paid weekly: California, Connecticut, New Hampshire, New York, and Rhode Island.
Q5. If I need to furlough employees indefinitely, what happens to those employees who are employed on a visa?
A. This will partly depend on the type of visa under which the employee is working. In some cases, the visa requirements will permit an employee to remain in the United States for a grace period of up to 60 days after employment ends to allow them time to find another employer who will sponsor them before they must leave the country. Others may be here on a more or less permanent basis or maybe able to obtain status through a spouse or other close relative. In any case, the employer who lays off a visa holder may have notice and certain financial obligations, such as payment for the return trip to a home county. Understanding the parameters around the type of visa and its requirements will be necessary for both the employer and the immigrant employee.
Q6. Can I reduce work schedules to limit my prospective cash liabilities?
A. Generally, yes, but as noted in FAQ #1, you cannot reduce exempt employees’ salaries below applicable minimum salary thresholds if you intend for them to retain their exempt status; moreover, you can only prospectively reduce salaries and, as noted above, if an exempt employee works even one day in a workweek, they are entitled to the full week’s salary. Therefore, you may wish to provide notice and then implement a commensurate salary reduction that accounts for the reduction in expected workload or time. For nonexempt employees, you can always reduce schedules to limit your hourly wage liabilities — but beware of local “fair workweek” ordinances that require some amount of advance notice before changing nonexempt employees’ schedules.
Q7. I am a business owner who draws a salary. Can I just forego my own compensation for a time until we gain sufficient liquidity again?
A. If you are an exempt employee with a significant and meaningful ownership in the business (not just stock options or limited equity), you can agree to forego a salary draw. Doing so with yourself, however, is one thing; be careful if you choose to do this with other business “owners,” because the vast majority of employees cannot waive or otherwise forego their right to draw compensation for time they have worked.
Q8. What if an employee gives me a written waiver or other agreement that they are okay with not being paid until we regain access to sufficient liquidity?
A. These kinds of waivers or agreements are invalid and cannot be relied upon as a defense (except as noted in FAQ #7 above with respect to business owners) to paying wages. The FLSA and most state wage laws expressly prohibit employees from waiving their right to timely payment of wages, so there is no legal means by which you can get such an agreement from an employee, and you will continue to accrue liability regardless of any agreement.
Q9. What if we have upcoming severance payments owed under existing Separation or Severance Agreements, can we delay those payments?
A. The answer depends on whether the severance payments are considered wages under applicable state law. However, even if they are not wages under applicable state law, you risk a breach of contract claim, which can create other exposure for the employer. This exposure could include attorneys’ fees to the prevailing employee for the breach of contract if the agreement includes an attorneys’ fee provision or such a remedy is available under applicable state law. More importantly, the failure to make an upcoming payment could allow the employee to pursue the claims he or she released as part of the separation or severance agreement, which can create greater significant exposure for the employer.
Perhaps the best approach with respect to these sort of issues is to seek an “amendment” or modification of the agreement to “delay” such payments. Most separation and severance agreements are just “contracts.” All contracts can typically be amended or modified, but it usually entails both parties to agree on such an amendment or modification.
Please reach out to members of the Bank Receivership Task Force or to your Foley relationship partner if we can provide assistance.
