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What Happens If my Business Misses Payroll?

Close-up of a businessman's hand opening envelope with paycheck
By George Khoury, Esq. on May 17, 2019

Business owners from small to large all know that employees want their paychecks on time. Missing payroll, for any reason, is liable to send your workers right out your door and directly to the competition, or worse, to employment lawyers.

Simply put, missing payroll can become a very costly legal problem as it is likely a violation of several labor codes, as well as tax codes that could land your business, and maybe even you as owner personally, in even worse financial trouble than what led to missing payroll in the first place. Below, you can read more about the legal problems that could befall the business, as well as some practical advice on how to handle the situation.

Penalties Fines and More

In addition to paying employees on time, employers are also responsible for the payroll taxes as well. Failing to pay either can lead to costly financial penalties and fines, not to mention the legal fees to defend the business.

In addition to the various state labor laws, the federal Fair Labor Standards Act (FLSA) also calls for penalties for failing to pay employees on time. The federal Department of Labor can investigate and bring an action against your business, just like a state labor commissioner or department could as well. These actions will generally require employers pay any unpaid payroll, plus interest, a fine or penalty, and sometimes may even include a multiplier (meaning that the amount you failed to pay can be increased even more).

Then, there's the tax liability both from the IRS and the state taxman, which, if you don't pay increase at varied rates that you really don't want to pay.

Avoiding Payroll Catastrophe

The best way to avoid missing payroll is to always be ahead so that a hiccup or two or three, doesn't sink the ship. This means that you aren't relying on any given week's account receivables or sales to pay that week's payroll. If you pay your staff from revenues received a month prior, you can adjust scheduling based on available funds, or even institute layoffs if need be.

But, as the business realities often dictate that it won't always be possible to avoid a cash-flow catastrophe, there are a few things you can do to get the money you need for payroll.

  1. If you have the lead-time, you may be able to secure a small business loan, or even to sell off unused assets of the business for a good value.
  2. However, as doing either of those things could require more time than you have, many business owners dip into their personal finances to meet payroll obligations.
  3. If those aren't available, consider asking family, friends, or business associates for a loan.
  4. Alternatively, if you have customers without outstanding debts, you could offer steep discounts in return for prompt payments.

Lastly, if you are facing a payroll catastrophe, you may want to have an honest discussion with your employees, or at least your managers, as soon as possible, so as to stay on the best terms possible with the employees who may soon all have legal claims against your business. It also probably wouldn’t hurt to call up an experienced business attorney who may be able to help you figure out a plan to keep your business from going under due to one missed payroll.

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