Top Five Employment Issues Upon a Sudden Bank Failure

Client Alert

The sudden closure of a bank can create a host of ripple effects. It is important that employers stay alert and vigilant in managing their employment practices when faced with liquidity concerns that inevitably arise from such events. For example, the closure of a company’s bank (or its payroll provider’s bank) does not suspend the company’s legal obligations to timely pay employees and operate its payroll systems.

Below is a summary of key considerations for employers that are faced with this circumstance:

  • Prioritize Payroll to Avoid Substantial Penalties. Employers impacted by a bank’s closure may have difficulty timely paying employees’ earned wages. In California and many other states, employers will be subject to penalties not only for the failure to timely pay wages upon termination of employment but also for the failure to pay employees on time during the course of employment. Federal and state law also impose interest on wages that are not paid on time. 
  • Decisionmakers May Have Personal Liability for Failing to Pay Wages. Federal law and many state laws impose personal liability on certain individuals for the failure to timely pay wages and for other wage and hour violations. In California, for example, Labor Code Section 558.1 holds owners, directors and managing agents of a company personally liable if they violate, or cause to be violated, the state’s wage and hour laws. As a result, decisionmakers may find themselves personally on the hook if they prioritize other debts over payroll when faced with a sudden cash shortage. The fact that the cash shortage is caused by a bank failure out of the company’s control is not necessarily a defense in these circumstances. 
  • Comply With Tax Obligations. Federal and state payroll taxes must also be timely paid. Late tax payments may incur certain penalties for delinquent payments depending on the state. While governments may choose to waive penalties depending on the circumstances, employers should not make any assumptions. 
  • Carefully Consider the Implications of Employee Furloughs and Layoffs. Requiring employees to work and provide services despite an employer’s inability to pay them for earned wages is a violation of federal and state laws. Employers may decide to furlough or terminate employees until liquidity issues are resolved, but before doing so, it is imperative that employers proceed properly.
    • Employers should review employment agreements, offer letters and any other pertinent employment policies to ensure that all severance or termination obligations are met.
    • Determining whether an event is a temporary furlough that is not considered a termination of employment, or a layoff that is considered a termination of employment, is complicated, and the employer’s obligations to workers vary under each.
    • A termination event triggers potential final pay requirements, as well as notice obligations under the federal WARN Act and state WARN acts, which often differ in important ways. In California, for example, the state’s WARN act has been held to apply and to require 60 days’ notice to affected employees even when an intended work stoppage is as temporary as four to five weeks. See International Brotherhood of Boilermakers v. NASSCO Holdings, Inc., 17 Cal. App. 5th 1105 (2017), review denied (February 14, 2018).
    • In the event of a furlough or temporary reduction of hours, employers should ensure that any exempt employee subject to this action does not work a partial week. Under federal law, exempt employees who work a partial week must be paid their full salary for the week, and failing to do so risks both claims for unpaid wages and undermining the exemption altogether.  
    • For employers with group health plans, taking action to reduce the hours of, furlough or lay off employees could trigger federal and state COBRA notice requirements, depending on their plan terms and conditions. Typically, short-term work absences do not result in a loss of coverage that would trigger COBRA, but it depends in part on the plan’s terms, which should be reviewed. Like the WARN Act, many states have their own COBRA scheme, which must also be considered.
  • Make Contingency Plans to Avoid Shortfalls. Given the potentially severe consequences that may arise from failure to timely pay wages, and the collateral effects of furloughs and layoffs, employers should carefully monitor their capacity to fulfill their payroll obligations on an ongoing basis. Employers may consider securing other sources of capital, such as from investors or loans, in order to avoid potential wage and hour liability. Further, employers may want to look into employment practices liability insurance policies that may cover disputes arising from these kinds of issues. At the very least, because officers and directors could be personally liable for the failure to meet payroll obligations, they should examine their indemnification rights.

Key Takeaways: Employers should prioritize fulfilling their payroll obligations with any available funds, given that the failure to do so could be a costly mistake. If necessary, employers should consider seeking lines of credit or loans to secure sufficient funds. In the event the employer has exhausted all possible avenues and it has become evident that timely payment is infeasible, the employer should consult with counsel to help communicate directly with employees to explain any potential delayed timing for wage payments and the steps the employer is taking to mitigate the circumstances. Finally, employers should keep diligent and accurate records of their good faith efforts to ensure timely payment of wages in case they are subject to any potential liability or prosecution.



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