Failed Bank Clients Risk ‘Draconian’ Fines if They Miss Payroll

Poted by Peter Smutelovic.

The most talked about topic in past few days is the collapse of Silicon Valley Bank. Bank run just happened with Silicon Valley Bank. Bank runs happen because Bank does not actually have all your money. All banks do the same thing they take money from depositors and loan some of that money or buy some other assets to make profit. The problem is when all people want their money back at the same time. This result in a bank run. So why all people wanted all their money from Silicon Valley bank out.

The problem was with bond, because Silicon Valley used the deposited money to buy loans to gain interest on the money. However, as interest rates increased the value of the purchased bonds decreased in price, became less valuable. Problem occurred when they had to sell the bonds back since customers wanted to take out money. So, Silicon Valley bank had to sell the bonds at a huge loss. Because they needed money for all the people wanting to withdraw money. When people heard that bank might not have enough money, all the people wanted to take out their money to make sure that they do not lose them if the bank collapses which led to bank run. This led to federal regulators announce a plan that would give Silicon Valley Bank depositors an access to their money.

“Looking at the liquidity crisis that loomed over the weekend, employers were really between a rock and a hard place,” Caminiti said. “They might not have had access to their funds, but they may have still been exposed to significant damages and penalties, as well as the potential for personal liability” for company executives. The penalties for unpaid or late wages vary widely but can be dramatic. Massachusetts and New jersey businesses can owe damages worth triple the number of wages. California imposes smaller civil penalties for unpaid or late wages, but lawsuits brought under the state’s Private Attorney General Act add to the legal risks for employers there. California regulators signaled in an email to Littler Mendelson P.C. attorneys they wouldn’t pursue late payments related to the Silicon Valley Bank failure as “willful” violations, and that the state agency would aim to resolve related PAGA(The Labor Code Private Attorney General Act-authorizes aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations) claims outside of litigation. “Especially in light of the significant uncertainty, these are prudent steps to mitigate the impacts on companies that are operating in good faith and their employees,” Lisa Powell, general counsel for the California. This approach will focus on companies impacted by the closure, and it is important to emphasize that this is not an invitation for companies that have access to funds to make payroll to delay those payments.
Federal wage and hour law doesn’t outline an explicit timeline for when payment is due, but various courts and the US Department of Labor have interpreted a missed paycheck as a violation of the Fair Labor Standards Act. An employer also can face liquidated damages for an FLSA violation, unless it can prove it “acted in good faith” or had “a reasonable belief that it was complying with the FLSA.

According to Noah A. Finkel, an employment attorney with Seyfarth Shaw LLP in Chicago, states differ in how they define a late paycheck, with some demanding payment a particular number of days after a pay period ends and others not establishing a deadline. In a scenario where bank savings momentarily become unavailable, employers would have a good case for saying that authorities should be kind, maybe by levying less fines, Finkel said. He replied, “It would seem that a breach would not be purposeful in this circumstance. A different situation would arise if an employer asked employees to labor even though they knew they wouldn’t be paid, according to Finkel. In that case, employers likely would have to furlough employees until funds became available again or else face potentially steep penalties for wage violations.
“Problems with this plan occurs when employers can’t be sure whether a late wage payment would be shown leniency because of factors beyond the company’s control, “Caminiti said, adding that the standard for a “willful” violation doesn’t require malice. So to try to help the bank, by giving them some allowance is not a great solution since most of the people live from paycheck to paycheck and they need the money now.

Peter is an economics major class at the Stillman School of Business, Seton Hall University, Class of 2025.