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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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30th October 2023

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.

Contents
  1. What Happens if You Can’t Pay Your Staff Wages?
  2. What are Your Options if You Cannot Afford Staff Wages?
  3. What are Your Practical Options if You Can’t Pay Employees?

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

Not being able to pay your staff wages is a serious matter. It can have a number of negative consequences, including:

  • Financial hardship for your employees: Your employees rely on their wages to pay their bills and support their families. If they are not paid on time, they may experience financial hardship, such as overdraft fees and late payments.
  • Damage to your employee morale and productivity: When employees are not paid on time, it can damage their morale and productivity. They may feel undervalued and unappreciated, and they may be less motivated to work hard.
  • Increased turnover: Employees who are not paid on time may be more likely to leave their jobs for other employers who can offer them financial stability. This can lead to increased turnover costs and make it difficult to find and retain qualified employees.
  • Legal action: Employees have the right to be paid on time. If you do not pay your employees on time, they may take legal action against you. This could result in you having to pay your employees back wages and penalties.

In addition to these consequences, not being able to pay your staff wages can also be a sign of more serious financial problems. If you are unable to pay your staff wages on a regular basis, it may be a sign that your business is insolvent. This means that you may not have enough assets to cover your liabilities, and you may need to file for bankruptcy.

If you are unable to pay your staff wages, it is important to take action immediately. The first step is to consult with your bookkeeper, accountant or ourselves to assess your financial situation and develop a plan to resolve the issue.

It is also important to communicate with your staff about the situation. Be honest with them about why you are unable to pay them on time, and let them know what steps you are taking to resolve the issue. Reassure them that you are committed to paying them their wages and that you will do so as soon as possible.

What are Your Options if You Cannot Afford Staff Wages?

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

  • Finance: You may be able to secure a bank loan, alternative financing, or invoice financing to improve your cash flow.
  • Chase late payments: Work with your accountant to identify any outstanding invoices that need to be paid.
  • Liquidate surplus inventory: If you have excess inventory, consider selling it to generate cash.
  • Renegotiate payment terms: Talk to your suppliers to see if they are willing to renegotiate your payment terms, such as giving you longer to pay.
  • Cut your own salary: You may be able to free up cash by reducing your own salary for a period of time.
  • Cut back employee hours: Reducing employee hours can reduce your payroll costs, but it is important to consider the impact on morale and productivity.
  • Temporary shutdown: If necessary, you may need to temporarily shut down a premises or facility to save money.
  • Voluntary exit incentives: You may be able to offer voluntary exit incentives to employees, such as early retirement packages.

It is important to carefully consider all of your options before making a decision.

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

If you are unable to pay your employees, you have two main options:

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.