In a small or medium-sized business, and particularly a family-owned business, employees are often recognized as the most valuable asset in the business. It is not uncommon to hear management refer to the employees as “family” or “partners” to share in the ups and downs of the business.
It is, however, important to recognize that regardless of the close working relationship that exists between management and employees, employees have legal rights which cannot be overlooked. When a company finds itself in a liquidity crisis, management will be trying to preserve cash, raise cash, and will also be spending precious time managing customer relations and working with unpaid vendors on past due balances, while also negotiating terms for new materials and services. Since they will be juggling a lot of balls at once, they can easily back into a series of mistakes that can prove costly to both management and employees.
The first mistake, due to management being distracted, might be that they are unable to pay payroll tax withholdings. It is easy to forget about the tax withholdings when a company handles its own payroll because when payday arrives, the company is focused on having sufficient funds to cover the payroll checks: total pay less the withheld payroll taxes, medical insurance contributions, etc. As payroll tax withholdings are paid at a later date, sometimes monthly or quarterly, a company in financial distress may discover that it does not have sufficient funds to remit the withheld payroll taxes.
Failure to pay payroll tax withholdings can lead to substantial, personal liability: equal to the amount of the unpaid withheld payroll taxes. Individuals who may be subject to this personal liability include “responsible persons,” such as officers, directors, owners, and others with significant control or authority over the company’s finances.
Another critical issue that small to medium-sized businesses may face is the inability to pay their employees’ wages. This can occur when expected cash receipts do not arrive as anticipated or a transaction does not close as expected. In the worst case scenario, the company runs out of runway and has to shut its doors. In that instance, there may not be sufficient funds to cover payroll, accrued vacation pay, etc.
Besides resulting in the obvious relationship disaster, the business’s management and owners may face civil and criminal penalties. For example, in California failure to pay wages can be considered a form of wage theft. Depending on the amount owed, the charge can be considered a felony punishable by imprisonment, fines, and restitution.
If employees are terminated in California, employers must pay the employee their final wages and accrued vacation pay on their final day. Failure to do so carries with it “waiting time penalties” equal to the employee’s daily rate, for every day they are not paid their final paycheck, up to a maximum of 30 days. This can create a significant, additional liability for the employer.
Finally, if a business is contemplating shutting down a facility or the closing the whole business, management must comply with the Worker Adjustment and Retraining Notification (“WARN”) Act. This act generally requires an employer with more than 100 employees, that is laying off at least 50 people from a single site, to provide at least 60 calendar days advance written notice of the worksite closing. Failure to do so may subject the employer to liability to its employees for backpay and benefits for an additional 60 days.
California is one of the states that has its own WARN Act. California requires the 60- day notice for companies with at least 75 workers, including part-time workers. Notice must also be given to certain agencies and local government offices.
The last thing a company in financial distress wants to do is expend money on legal fees. Yet, it is vital that management seek out advice from counsel when the company is having financial problems and may need to take action that will impact its employees. Failure to adhere to these requirements can have serious consequences, not only to the employees, but also the management, owners and others who have a leadership or ownership role in the company.