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Silicon Valley Bank Collapse: The Employment Law Risks and Solutions

The collapse of Silicon Valley Bank on Friday should be taken seriously by every company and employer. Aside from the potential banking, finance, bankruptcy, venture capital, and investment legal issues, the employment law ramifications resulting from the SVB collapse cannot be underestimated. Because many employers have expressed concerns about payroll and other employment-related legal matters, this article presents our initial understanding of the legal risks and some preliminary solutions to mitigate them.


I. What is Happening to SVB and SVB’s Account Holders

All bank accounts at SVB have been frozen, and money currently in these accounts is not accessible. SVB is scheduled to reopen on Monday, at which point each account owner will be eligible to receive up to $250,000 in FDIC funds, the current limit. We anticipate that account holders will receive a Receivership Certificate indicating the total amount held in their SVB accounts. But the availability of any amount exceeding $250,000 will depend on the outcome of the bankruptcy or restructuring process, or federal action. Until there is more certainty regarding SVB’s future, account holders will not be able to withdraw more than the maximum federally insured limit of $250,000.


SVB’s failure is already impacting payroll. Companies that use SVB to process payroll may not be able to timely meet their payroll obligations, or meet them at all.


II. Potential Employment Law Risks


We identify at least three employment law risks after SVB’s collapse:


1. Payroll Delays or Failures - Penalty on Failure to Pay / Delayed Parolls: Because many companies' payrolls will be impacted, there is a substantial risk that employers will face penalties due to delayed payments. For example, in California, home to SVB itself and many of SVB’s business banking clients, the law provides for a waiting time penalty for delayed payments to employees, and the penalty increases for consecutive or secondary subsequent failures to timely pay wages. Additionally, there is a daily wage penalty, meaning that for each day the employer delays payment to its employees, the employees are entitled by law to one day's equivalent wages. This penalty can add up quickly without emergency funding.


2. Class Action/PAGA Action: Failures to meet payroll will be widespread among employees. Accordingly, in California, the risk of representative actions, either class actions or lawsuits under the Private Attorneys General Act (PAGA), is high. Class actions in all jurisdictions typically have similar threshold requirements, such as numerosity, typicality, adequacy of representation, and so on. But in California, a PAGA lawsuit lacks these requirements and can be brought by a single employee without the usual class action procedure. PAGA actions frequently relate to wage and hour issues, and failures to timely meet payroll are ripe for PAGA litigation. Indeed, we have received information that plaintiffs’ law firms are already preparing to launch class and PAGA actions on Monday against any company that is unable to pay its employees. The statutes that provide for these lawsuits frequently require a losing employer to pay the employee’s attorney fees, without a reciprocal shift if the employer wins. Therefore, the potential attorney fees must be considered when assessing the litigation risk to the employer.


3. Government Administrative Action: In addition to litigation brought by private parties, the government is empowered by law to act and may elect to do so. Although, for example, the Department of Labor is fully aware of the situation triggered by SVB and they may give some leeway to companies, it is possible that it will send audit requests to employers requiring them to provide information, such as wage statements. Based on our past experience, there are multiple large national providers who have not been to provide or add this category information on the payroll step, which leads to further legal action. It can be challenging to deal with a request from the Department of Labor.


III. Preliminary Solutions:


We suggest employers take the following action:


1. Draft an Employee Communication Letter to All the Employees Being Impacted: An employee communication letter will let employees know what has happened, and what the employer is doing to mitigate the impact of SVB’s failure on its employees. Such a letter will not bar wage-related lawsuits, but our past experience demonstrates that clearly communicating the employer’s situation and point of view to employees can make them less motivated to litigate.


We would be happy to provide you with a template for such a letter. If you would like one, please contact us immediately. Our contact information is listed below.


2. Secure Emergency Funding: The best way to avoid litigation for failing to make payroll on time is to make payroll on time. We therefore strongly suggest immediately seeking the funds necessary to meet your payroll obligations.

3. Negotiate with Contractors to Avoid Late Payment Penalty: Payment obligations to employees are not the only source of risk here. A company’s contractual obligations to its contractors also must be considered. We, therefore, suggest that employers talk with their contractors immediately to negotiate potential solutions to avoid defaulting on their contractual obligations.


SVB’s collapse is a historic event that, in a moment, has thrust a great number of employers into substantial legal risk. If you want to learn more about the potential legal risks and our solutions, please feel free to reach us at richard.liu@consultils.com, or call us at 626-628-8894.

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