Quirky Question #235, Payment of Wages – Better Late Than Never Is Half Right

by Dorsey & Whitney LLP
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Question:

My company was in a tight spot last month with cash flow and we had to delay payroll by a few days. We did end up paying everyone what they were owed. I now have an employee, however, who is claiming the late payment violated her rights and that we owe her more money. We paid her all the wages she was owed, just a few days late – is it possible we owe her more?

Answer:

As surprising at is may sound, for purposes of assessing penalties under the federal law governing payment of wages, late payment means no payment.  So you probably owe this employee – and all other employees who received late paychecks – an extra paycheck for the full amount of the check that was late. (Since you were silent about the state where your company has employees, I’ll mostly address your question under the federal statute.)

Under the Fair Labor Standards Act, the federal law that governs the payment of wages, an employer must pay its employees wages for all hours worked. An employer that fails to do so owes the employees the amounts that remained unpaid. Seems obvious enough – you have to pay your employees.

If, however, the employer’s failure was “willful” – in other words, voluntary, deliberate, or intentional, and more than merely negligent – “liquidated” or double damages are owed. Lots of courts have parsed the term “willful” to determine what it means in practice, but essentially the test is met when the employer knew it was violating the FLSA, or when the employer was recklessly disregarding whether there may be a violation of the FLSA. It is not necessarily a difficult burden for an employee to show willfulness. Most courts will presume the employer’s violation was willful and the employee is entitled to liquidated damages unless the employer can show it acted in good faith.

In your case, you said you decided to pay your employees late because of some cash flow issues, so it’s relatively easy to conclude your decision was intentional and you didn’t just make some good faith error. I’d conclude this, too, even if the cash flow problem itself was a good faith error that led to the late payroll.

It’s important to understand that the liquidated damages are like a penalty assessed against the employer for violating the law. They are meant to keep employers in check and not allow them to take advantage of employees by permitting them to work and then refusing to pay. But the penalty also applies when employers pay employees late. They penalize the employer and compensate the employees for the losses the employees may have suffered by reason of not receiving their proper wages at the time they were owed. Courts consider the time when wages are owed under the FLSA as the payday on which the wages ordinarily are paid. (State laws have a lot to say about how quickly wages must be paid after the work is done – I’ll get to that later in the post.)

An employee recently asserted a claim like this in a federal court in Pennsylvania, and the court denied the employer’s attempt to dismiss the case. In the case, Gordon v. Maxim Healthcare Services, Inc., decided on July 15 of this year, Maxim normally paid its employees, including Ms. Gordon, weekly on the Friday following the workweek that ended on the prior Saturday. On many occasions, Maxim paid its one or two weeks late. Ms. Gordon brought a class action lawsuit on behalf of her fellow employees, and in response Maxim moved to dismiss the case, arguing that even under Ms. Gordon’s version of the facts, there were no wages left unpaid so no basis for the case. The court disagreed. It concluded that “late payment constitutes nonpayment under the FLSA.” As a result, if Ms. Gordon’s allegations were believed, the court held, then liquidated damages were owed on those late payments. The court recognized its decision was unforgiving, but made the following observations:

This may appear to be a harsh result, causing an otherwise diligent employer who misses payday by a day or two to be subject to liability under the statute. Nonetheless, it must be remembered that the FLSA is to be liberally construed to achieve its purpose. The law is there to protect those who are receiving a minimum wage and are living from paycheck to paycheck. A delay of a few days or a week in the remittance of wages may only be a minor inconvenience to some, but for those at the lower end of the economic scale, even a brief delay can have serious and immediate adverse consequences.

As I mentioned earlier in the post, state laws are also very particular about how quickly wages get paid. Rules vary dramatically from state to state, but some states (including Massachusetts and Vermont) mandate that wages be paid in as quickly as 6 days following the end of the pay period. Pennsylvania, where Ms. Gordon worked and brought suit, requires employers to pay employees within 15 days from the end of the pay period. Ms. Gordon also asserted a claim under Pennsylvania state law, which, like the FLSA claim, the court allowed to proceed.

State laws governing how quickly employees must be paid come into play not just for occasional payroll hiccups. Those laws also can have serious consequences for employers that, like Maxim, normally pay employees in arrears (or on a date some time after the end of the pay period). Many employers use a one-week-in-arrears system, where two-week pay periods end on the first and third Fridays, and employees are paid one week later on the second and fourth Fridays. As you can see from the Massachusetts and Vermont requirements, national employers with employees in these states must be careful, and either apply a shorter arrearage period for all employees, or a shorter period just for employees in those states.

Of course, the arrears issue is just one of many state law paycheck requirements that can catch the unwary employer. Other issues include whether overtime and regular pay for the same hours must be paid on the same paycheck (some employees pay regular wages current but overtime in arrears), how wages are paid (paper paycheck, direct deposit, and/or debit card), where the wages are paid from (California law requires payroll checks be issued from a California bank), and the method of distribution and content of wage statements. Penalties for violating these regulations can be substantial, since violations may be assessed per employee, per paycheck, for up to three or more years, so multi-state employers would be wise to consult legal counsel for help in setting up their payroll policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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