As we have probably all heard by now, Silicon Valley Bank (“SVB”), the premier bank for high-growth startups, collapsed last week. This bank failure sent thousands of tech startups and venture capitalists into a panic. It created liquidity issues for many employers and among other serious concerns, it impacted their ability to pay their employees. Below we address some frequently asked questions relating to the collapse of SVB and its impact on employers.
The good news is that the federal government and financial regulators have announced a plan to mitigate the effects of the recent bank failures. As you may already know, the plan involves guaranteeing 100% of the deposits and placing the bank under the control of the FDIC, which will sell off the bank’s assets to repay customers. Although this news is positive, given the economic uncertainty, it will have a ripple effect on employers, employees and their families. Most importantly—bank customers may face a short-term cash crunch while they wait to get a return on their deposits.
Are employers that are unable to access their bank account(s) still required to timely pay their employees?
Yes—the fact that an employer’s funds are held by a particular bank does not absolve an employer of their legal obligation to pay wages and salaries to their employees. The collapse of the bank was only exacerbated by the fact that the news broke on Friday, which was a payday for many bank clients. The federal Fair Labor Standards Act (FLSA) and many state wage and hour laws require that employers establish a regular payday for their employees. Employers are required to pay employees on their established payday- even if the company does not have access to their deposits as a result of a bank failure.
What happens if an employer fails to pay its employees in a timely manner?
Lawsuits. Under the FLSA, for example, employers who fail to timely pay employees minimum wage and/or overtime pay may be required to pay back wages, which includes unpaid wages, liquidated damages (double the amount of unpaid wages), and attorney’s fees. The employer may also be subject to additional penalties, such as civil fines and criminal charges in some cases. Failure to pay minimum wage can result in civil penalties of $1,000 per violation. And there also is a risk that employers will lose the benefit of an FLSA exemption for salaried employees, which could result in massive overtime obligations.
What should an employer do if they are unable to access their account(s), but still need to make payroll?
Some alternative solutions include using personal funding, applying for a small business loan, applying for a line of credit, and liquidating company assets. Short term emergency financing might be available- you may need to work your network (including contacting your legal counsel) to see if there is someone who can help find funds, or at least help mitigate the problem.
If you have any questions about this Alert, how liquidity issues impact benefits, 401(k) plans, workers compensation, or are considering a reduction in workforce or furloughing employees, please reach out to your Shulman Rogers contact for solutions and recommendations.
The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Employment and Labor Law Group.
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