Good Reasons for Employers to Pay Wages by Means Other Than Cash Money

Some companies develop a habit of paying employees partially or fully in cash. This is a dangerous practice that can violate various laws, particularly if the company is not properly documenting the payments.

While it is not outright illegal, there is no compelling reason for employers to compensate their workers in cash. Doing so can give the immediate impression of an attempted irregularity, such as the employer or the employee not wanting to report the income or pay any required taxes. Paying taxes is of course a cost of doing business and it needs to be part of any company’s budget.

There are concrete reasons not to pay cash other than just conveying the wrong impression to an outside observer. State and federal laws require an employer to: (a) keep records of all wages paid to employees; (b) make tax filings showing what the employees were paid; and (c) provide the employee with a pay stub. Federal law specifies that employers:

• Maintain several pieces of information on an employee’s pay. See, Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA).
• File reports of wages paid to each employee and resulting employment taxes. See, Depositing and Reporting Employment Taxes.

In California, employers must:

• Keep pay records and permit employees to review them. See, Personnel files and records.
• Provide detailed pay stubs to employees. See our article, California’s Itemized Pay Stub Requirements.
• Make tax filings showing what employees have earned. See, Reporting Your Taxes.

Paying by check or electronic means facilitates the maintenance of this required documentation. Ideally, all businesses, no matter how small, should have a computerized program where they record all information concerning employee wages and/or a payroll service that does so for them so that if an employee wants information about past pay or sues the company, or a government agency wants to do an audit, you have full and defensible records.

If you have been paying in cash, it’s a good idea to switch over to a well- documented system of paying employees that enables you to show clearly company compliance with applicable laws.

For more information, please contact one of our attorneys Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

June 3, 2016