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Should I pay employees or vendors first?

I answer questions on Avvo pretty regularly. From time to time, I will reproduce (perhaps with modest editing) some of the questions and answers here on my blog.

Question: If an employer has cash flow problems, who should be paid first: employees or vendors?

Answer: I see this situation as requiring analysis from both the business and the legal perspectives.

Business: I believe that employees are more important, and are less able to do without the money to which they are entitled, than (most) vendors, so I would pay employees first.

Legal: While either employees or vendors could bring suit against the employer, employees also would have the ability to file, at no cost, a wage claim with the Division of Labor Standards Enforcement. In my opinion, DLSE investigation of a wage claim is worse than a lawsuit, so for this reason, too, I would pay employees first.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Categories
Employment
  1. 9/5/2009 | 5:49 pm Permalink

    Dana, you might want to say something about payroll taxes as well, which often gets lumped in with this decision.

  2. 9/5/2009 | 8:01 pm Permalink

    @Walter Feigenson
    Good point, Walt. When employees are paid, all required withholdings should be deducted and paid to the appropriate governmental entities. If there is anything worse than a vendor lawsuit or an employee wage claim, it’s a government suit for unpaid taxes, interest, penalties, etc.