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Reviewed by
Chris Andersen
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Reviewed by Chris Andersen

Chris became an Insolvency Practitioner in 2014 and is currently regulated by the IPA.

He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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11th April 2024

Being unable to pay your staff’s wages is a difficult and stressful situation for both employers and employees. It can be caused by a variety of factors, such as unexpected expenses, declining sales, or late payments from customers. Whatever the reason, it is important to take action quickly to minimize the impact on your business and your workforce.

This article aims to offer practical advice on navigating this situation, outlining both immediate and long-term strategies to consider.

What-to-do-if-you-Cant-pay-your-Staff_
Contents
  1. What Happens if You Can’t Pay Your Staff Wages?
  2. What are Your Practical Options if You Can’t Pay Employees?

What Happens if You Can’t Pay Your Staff Wages?

If you cannot afford to pay staff wages, there are a number of options available to you. These include:

  1. Secure Finance: This could be through traditional bank loans, alternative finance options like peer-to-peer lending, or invoice financing, where you borrow against the value of your outstanding invoices. These options can provide a lifeline by injecting necessary funds into the business, enabling you to meet payroll obligations.
  2. Chase Late Payments: Assess your accounts receivable and identify any overdue payments. Collaborate with your accounting team to actively pursue these late payments. This effort can bring in funds that are rightfully owed to your business, potentially easing the immediate financial strain.
  3. Liquidate Surplus Inventory: Search your inventory for any surplus or slow-moving items. Selling these items, possibly at a discounted rate, can generate quick cash.
  4. Renegote Payment Terms with Suppliers: Extending payment deadlines or restructuring payment schedules can provide temporary relief from financial pressures, giving you more time to stabilise your cash flow.
  5. Reduce Your Own Salary: As a director, consider temporarily reducing your own salary. This act not only frees up funds for staff wages but also demonstrates a commitment to the financial health of the business and the welfare of your employees.
  6. Cut Back Employee Hours: Reducing your staff’s working hours can decrease payroll costs. However, it’s crucial to balance this with the potential impact on employee morale and productivity. Transparent communication and fair implementation are key in this approach.
  7. Temporarily Shutdown Operations: In extreme cases, a temporary shutdown of a part of the business, such as a specific facility, can significantly reduce operating costs. This should be considered a last resort due to its impact on both staff and business continuity.
  8. Offer Voluntary Exit Incentives: Propose voluntary exit incentives, such as early retirement packages, to your employees. This can be a mutually beneficial way to reduce workforce costs, especially if there are employees willing to take these options.

Each option has its own set of implications and should be considered carefully.

What are Your Practical Options if You Can’t Pay Employees?

If you are unable to pay your employees, you have two main options: try to rescue the company or close it down. Company rescue involves taking steps to keep the business open and trading, such as entering into a Company Voluntary Arrangement (CVA) or administration. Formal insolvency involves closing the business down and winding it up.

Company rescue

A CVA is a formal agreement between you and your creditors that allows you to repay your debts over a period of time, usually at a reduced rate. Administration is a more formal process that involves the appointment of an administrator to take control of your business and try to save it.

Formal insolvency

If your business is not viable, you may need to close it down and wind it up. This is known as formal insolvency. There are two main types of formal insolvency: voluntary liquidation and compulsory liquidation.

  • Voluntary liquidation: This is the most common type of formal insolvency and involves you voluntarily closing down your business.
  • Compulsory liquidation: This is when a creditor forces you to close down your business through the courts.

Which option is right for you?

The best option for you will depend on your specific circumstances. Our experienced advisors are here to help you with free, confidential advice via live chat, telephone or email. We’ve helped thousands of directors through company debt.