If you can’t pay your staff wages, your business is in a cash-flow crisis. Failing to pay staff will erode trust, affect morale, and could prevent you fulfilling your current workload.
You’ll need to remain calm, get professional advice, and act promptly to get through it.
Read to find out what your options are when you can’t afford to pay employees.
First Steps When You can’t Afford to Pay Employees Wages
- Keep clear lines of communication open with employees if they’re going to be paid late. You should expect them to be worried and angry with the news, but they will appreciate being told over getting the shock of not being paid. Even if your team is close-kit and with a lot of loyalty to your firm, you should expect staff to be predominantly concerned with their own financial situation.
- Consider immediate options for raising money. Directors can loan the company money personally, you can sell assets, see if a customer can pay early, or utilise invoice finance. You can take out a business loan if your company credit allows.
- Try to give staff a clear idea of when they can expect to be paid via a timescale.
- Contact your accountant or financial adviser to examine the ongoing viability of the company. Is this a temporary blip or is it indicative of impending insolvency? Perhaps you have other creditors looming, beyond your employees.
- If you feel the company is insolvent, then you should contact a licensed insolvency practitioner such as ourselves. Insolvency means that you cannot prioritise one creditor over another – and this includes employees. An informal chat with an expert will ensure you don’t compound the insolvency by
What Does the Law Say Around Paying Staff Late?
Each employee’s situation will be laid out within individual employment contracts, so this is the first place to check.
Where an employer fails to make a payment on a certain date, as laid out in the contract, they are breaking the law. Employees can file cases with the employment tribunal for contract breach.
The Employment Rights Act 1996 (ERA) states withholding wages is illegal.
Rescue & Insolvency Options for When You Can’ Pay Staff
If the inability to pay employees is indicative of the state of insolvency, then your company is at a turning point. If the business remains viable, then you need to ensure the current situation won’t reoccur and that may mean some type of restructuring, revised business model, or better management of finances.
Insolvency practitioners are adept at business rescue as well as the formal methods of closing a company such as liquidation. Speaking with one will apprise you of your options which may include the following:
Company Voluntary Arrangement – Structured repayment plan with creditors for a percentage of the total debt. This must be voted into agreement by a majority of creditors, as well as proposed by a licensed insolvency practitioner.
Going into Administration – Administration means a moratorium from creditor action while an insolvency practitioner – acting as administrator – restructures the company.
Voluntary Liquidation – If the company cannot pay creditors, then closing it down via liquidation will be the right course of action. Liquidation means corporate debts are written off, the liquidator takes over creditor communication, assets are sold and the company formally struck off the register at Companies House.