As the economy continues to slide, some employers try almost anything in a struggle to avoid closing up shop. But if a shutdown or bankruptcy does occur, they risk not being able to cut final paychecks. Now a new and timely opinion letter from the California Department of Labor Standards Enforcement, the Labor Commissioner’s enforcement arm, may cause senior management to rethink leaving workers in the lurch.
Employee Volunteers Until Funding Comes Through
The new opinion letter arose out of these facts: Centrecom Inc. was facing cash-flow problems, so it had employee Barry Vincent Lyou sign an agreement to defer paying his wages until Centrecom found additional funding. However, the money never came through, Lyou was terminated and his deferred wages were never paid.
Lyou filed a state wage claim. And the DLSE eventually ordered Centrecom and Centrecom’s CEO, who signed the deferral agreement, to pay Lyou almost $35,000 in back pay and $9,230 in penalties.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Officers, Directors And Managers On The Hook
When asked why the CEO was liable for the unpaid wages, the DLSE issued the opinion letter explaining that individual officers, directors and managers can be personally liable for unpaid wages under state wage and hour law. The rationale is that an individual in this type of position may be considered an employer.
According to the DLSE, individual liability hinges on how much control the officer, director or manager had over the worker’s wages, hours and working conditions. Factors to consider include whether: 1) you have the power to hire and fire the employee; 2) you supervise and control the employee’s work schedule or employment conditions; 3) you determine the rate and method of payment; and 4) you maintain employment records.
Take Precautions
Because of this opinion, employees seeking back wages will be more likely to file claims that name individual officers, directors or managers—especially if the company itself could soon be insolvent. Keep these points in mind if you’re scrambling to stay afloat:
- Plan ahead to meet payroll if it appears that your company is facing a downturn. Remember to include in your calculations any earned vacation time and commissions or bonuses owed.
- Consider requiring employees to use up their accrued vacation. This strategy benefits both you and your workforce. By lowering the amount you would have to pay departing employees, you may be able to keep them employed long enough to survive hard times.
- Never permit employees to volunteer their services. As a general rule, state and federal wage and hour laws don’t permit volunteers to work at for-profit businesses. And even if you’re a nonprofit or government employer, workers can’t volunteer to perform the same kind of work they’re already paid to do.