When you close a restaurant, your obligations to your employees do not end on the last day of service. They end when every final paycheck is issued, every payroll tax is deposited, and every required notice has been given.
Owners who skip these steps create personal liability that survives the business closure. Unpaid wages and payroll taxes are among the most dangerous obligations in a restaurant wind-down because they attach to the owner personally, not just the business.
The WARN Act: who it applies to
The federal Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more full-time employees to provide 60 days' advance written notice before a plant closing or mass layoff. The notice must go to affected employees, the state dislocated worker unit, and the chief elected official of the local government.
Most independent restaurants have fewer than 100 employees and are not subject to the federal WARN Act. But several states have enacted "mini-WARN" laws with lower thresholds:
California requires 60 days' notice for employers with 75 or more employees. New York requires 90 days' notice for employers with 50 or more employees. New Jersey, Illinois, and several other states have similar requirements. Check your state's labor department website for the applicable threshold.
If your restaurant is subject to the WARN Act or a state equivalent, failing to provide the required notice exposes you to back pay and benefits for each affected employee for the period of the violation, up to 60 days. That liability is personal if you personally directed the closure without providing notice.
Final paycheck timing
Every state has laws governing when final paychecks must be issued. The requirements vary significantly:
In California, final wages are due immediately on the last day of work for employees who are terminated (not for those who resign). In Texas, final wages are due within 6 days of the employee's last day. In New York, final wages are due on the next regular payday. In most other states, final wages are due on the next regular payday or within a specified number of days.
The U.S. Department of Labor maintains a state-by-state guide to final paycheck laws. Check your state's requirements before you set your closing date.
Final paychecks must include all earned wages, including any accrued vacation or paid time off if your state requires payout of accrued PTO upon termination. Texas does not require PTO payout unless your policy promises it. California does.
Payroll taxes: the personal liability trap
This is the most dangerous area for restaurant owners closing a business. Payroll taxes -- the employee portion of Social Security and Medicare taxes that you withhold from employee paychecks -- must be deposited with the IRS on the normal schedule, even during a closure.
If you use payroll tax funds to pay other business expenses during the closure period, you are creating personal liability under the IRS's Trust Fund Recovery Penalty (TFRP). The TFRP holds any "responsible person" -- which includes the business owner and any officer who had authority over the payroll tax deposits -- personally liable for the unpaid employee portion of payroll taxes.
Payroll taxes are not dischargeable in bankruptcy. They follow you personally after the business closes. The IRS has 10 years to collect.
If you are closing and cash is tight, pay payroll taxes before you pay unsecured creditors. The IRS is a secured creditor with personal liability attached. Vendors and credit card companies are not.
Tips and tip credits
If your restaurant uses a tip credit -- paying tipped employees less than minimum wage on the assumption that tips will make up the difference -- you must ensure that each employee's tips actually brought them to minimum wage for every pay period. If they did not, you owe the difference.
The Department of Labor's Wage and Hour Division enforces tip credit rules. Violations result in back pay liability plus potential penalties.
Health insurance and COBRA
If your restaurant provided group health insurance, employees who lose coverage due to the closure are entitled to COBRA continuation coverage. You must notify the plan administrator of the qualifying event (the closure) within 30 days. The plan administrator then has 14 days to notify employees of their COBRA rights.
COBRA coverage is expensive for employees -- they pay the full premium plus a 2 percent administrative fee -- but the notification requirement is mandatory. Failing to provide COBRA notice exposes the employer to a penalty of $110 per day per qualified beneficiary.
What to tell employees and when
The legal minimum is the WARN Act notice period if applicable, and final paychecks on the required schedule. The practical minimum is treating your staff with the respect they deserve.
Give employees as much notice as you can manage without triggering a mass departure before you close. Two weeks is the minimum. Four weeks is better. Be direct about what is happening and when. Employees who are surprised by a sudden closure are more likely to file wage claims and less likely to help you through the wind-down.
If you have long-term employees, consider whether you can provide any severance. There is no legal requirement for severance in most states, but it is the right thing to do for people who have worked for you for years.
For the complete closing checklist, see How to Close a Restaurant: The Step-by-Step Checklist. For a look at what the full closure will cost, The Real Cost to Close a Restaurant covers all the categories. If you want a second opinion on your specific situation, book a call with Rod.