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Nonprofit Employers: Avoid Serious Liability for Unpaid Wages and Payroll Taxes

Nonprofits facing a budget shortfall—due to late or inconsistent funding, unexpected major expenses, or a host of other reasons—may decide to delay the payment of employee wages and/or payroll taxes to help bridge the gap, at least until additional funding arrives. Nonprofit employers may believe that delayed or deferred wages are preferable to terminating an employee or reducing their hours; employees, for their part, may even agree, at least in the short term. All parties may be motivated by their commitment to the nonprofit’s mission, and may be hopeful that additional funding will soon be secured.

While these impulses are understandable, failure to pay wages can expose your nonprofit to serious liability under both D.C. and federal law—liability that may extend to individual officers and directors. These liabilities may include penalties and fees that greatly exceed the value of the back wages themselves.

If your nonprofit cannot meet current or upcoming payroll obligations, do not allow the affected employees to perform any additional work.* Instead, nonprofits should immediately adopt permanent or temporary reductions in staff, or staff time, to conform with the organization’s financial situation. Put another way, always pay your employees – and don’t employ people who you can no longer pay.

Penalties for Unpaid Wages

The D.C. Wage Theft Prevention Amendment Act of 2014 established and enhanced an array of civil and criminal penalties for employers who fail to pay wages in accordance with the Act. Under the Act, employers in unpaid wage claims may be liable for:

  • The value of the back wages themselves;
  • Liquidated damages equal to triple the amount of unpaid wages;
  • The employee’s attorney fees, if they bring an action in court;
  • Statutory penalties;
  • Any other legal or equitable relief that a court believes is appropriate;
  • Suspension or denial of the nonprofit’s business license; and
  • Misdemeanor liability and fines for individuals who willfully or negligently violate the Act.

Employees may either seek relief through the D.C. Department of Employment Services, which has an administrative process to investigate wage claims, or they may bring a civil claim in court.

Penalties for Unpaid Payroll Taxes

Some cash-strapped nonprofits may also fail to transmit federal payroll taxes that have been withheld from employee paychecks, and may instead treat these withholdings as a source of emergency funds.  The IRS has numerous tools that it can use to recover unpaid payroll taxes, and the agency is empowered to impose a penalty equal to the amount of the unpaid taxes.  Furthermore, the IRS has the authority to hold any “responsible person” personally liable for payroll taxes that are not timely paid.  In the nonprofit context, a “responsible person” can include anyone who exercises significant control over the nonprofit’s finances; depending on the circumstances, this can include a nonprofit’s treasurer, president, executive director, CEO, other officers, and other board members.

Be Proactive, Be Realistic

In light of the significant liability that may attach to unpaid wage and payroll tax claims, nonprofit directors, officers, and staff must be diligent in assuring that payroll obligations are always being met.  If a nonprofit is facing financial difficulties, it is preferable to terminate an employee than to have him or her work for no pay. Aside from avoiding payroll liability, terminating an employee allows them to seek unemployment insurance benefits and to begin the process of finding new work.  Nonprofits facing minor or temporary shortfalls may also consider cutting employee hours, prospectively cutting salaries, or using employee furloughs to match the nonprofit’s ability to pay.

 * These payroll obligations include vacation time that is accrued and paid out to employees at termination.  Your nonprofit must be able to pay out any accrued vacation that would be owed to a departing employee.