What Happens If Your Employer Misses Payroll?

Half of small businesses don't survive past five years, and salaries often make up the bulk of expenses for a small business. As such, businesses find themselves unable to meet payroll more often than you like to think. No business wants to be in this position, as associated fines and penalties stack up quickly. While, as an employee, your wages are a legal obligation for your business, a missed payroll might be a signal to begin exploring other employment options.

An employer who misses payroll is almost certainly in violation of federal or state labor laws. Although these laws vary from state to state, all employers generally are required not only to pay you at a minimum wage but also to make those payments within a certain time period. Overtime pay is an exception, since some businesses cannot calculate this until after a pay period, but businesses generally must pay this by the subsequent pay period as well. Employers that miss payrolls also likely are in violation of tax laws, as they probably are not paying payroll taxes either.

If you don't receive a paycheck, you first should notify your employer in writing and keep a record of that communication. Tell your employer you will file a claim if you are not paid within a week. If the response is not satisfactory, you should then file a report with the wage division of either the United States Department of Labor or your state labor department. You also can take your employer to small claims court or, if you are missing a sizable amount of wages, hire an employment lawyer. Your employer will have to cover your legal fees should you prevail in court.

If you suspect your employer missing payroll was more than a one-time error or cash flow problem, you might take it as a cue to dust off your resume and start looking into employment elsewhere. Because of penalties, potential lawsuits and tax implications of missing payroll, it's often an indicator that a company's finances are in critical condition. The next step often is furloughs -- asking employees to take unpaid leave -- wage cuts, layoffs or bankruptcy. While unpaid wages usually receive high priority in bankruptcy settlements, they will be behind secured debts such as money owed banks, and you might end up with pennies to the dollar on your earned wages.

Employers should tap any resource possible to avoid missing payroll, even if they have to liquidate personal assets or dig into their own savings. One possible solution is asking the highest-paid employees to wait on payment if this is sufficient to cover the rest of the employees. It's not legal in most states, however, to pay employees only a portion of their wages. If employers project a problem meeting payroll, they should notify their employees as far in advance as possible. This can mitigate later problems, as many employees will take it as a cue to seek employment elsewhere before payroll problems reach critical mass.