If you are in the position that you can’t pay employees on payday this could have disastrous consequences for your business. Suddenly losing your workforce will see business operations rapidly grinding to a halt. This would then prevent you from taking on any new work and make it difficult to fulfil current orders as well as pay your own bills. If your company is experiencing cash flow problems and can’t afford staff wages then read on.
If you want your business to be successful, it’s important that you have employees who are dependable and can get the work done. And in order for them to be able to rely on you, they need to know that you’re a good employer who will pay staff wages on time and in full.
Although you should always prioritise paying your staff, there may be times when this is not possible. If this occurs, use the following steps as a guideline.
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If you can’t afford staff wages this month
The business owner should make it a priority to pre-warn employees as soon as they know that their upcoming wage will be less than what was agreed upon. By doing this, you’re not only giving them a chance to brace for the news, but also putting them in a position to make other arrangements in lieu of salary payments.
It is reasonable to anticipate a hostile response from employees when you announce that the company is unable to pay wages for the upcoming month. Remember, while your business may have financial difficulties, your staff members are likely more worried about their own ability to make ends meet without their salary.
If you can give them a timeline of when they will receive the money they are owed, this conversation will go more smoothly. If you’re uncertain of when payment will be made, try to at least let your employees know if the situation is temporary or not before next month’s payday.
Your employees might accept working without pay for a little while, but it’s not sustainable in the long term. If you don’t start paying your employees again soon, they will eventually stop coming to work. Additionally, by continuing operations despite not having enough money to pay your workers, you’re only making your company’s financial situation worse. These issues need to be fixed as soon as possible if you want your business to survive.
Back to basics – can’t afford staff wages
Before moving forward, it is important to understand why you cannot pay your employees this month. Has there been a decrease in demand for your product or service, causing less revenue? Alternatively, have you had unplanned spending that has depleted your cash reserves? It could also be because one or more clients have not made their payments on time, which then impacts your business’s cash flow. It’s unfortunate that in many industries, late payments are common. This can be frustrating for small businesses that might not have the cash flow to weather the storm until payment comes through.
Invoice financing
If you’re currently worrying about late payments from clients, then you should consider invoice financing. It lets you access a set percentage of your unpaid invoices immediately. This way, there’s a healthy continuation of your cash flow, and valuable assurance as to when exactly you will get paid for the work done. Though you have to pay for this type of financial arrangement, it may be worth doing if it lets you pay employees on time every month and keep business going without interruption.
Formal insolvency – if you can’t afford staff wages
If your business is insolvent, as director, you have a duty to prioritize the interests of its creditors above the company itself. This means you need to take care not do anything which could make the position of your creditors worse. For example, if you haven’t paid your employees, they become a creditor of the company and their welfare must be adequately safe-guarded.
If you are a limited company director, it is in your best interest to speak with a licensed insolvency practitioner as soon as possible. This way, you can ensure that you are meeting your obligations and also work towards the best possible outcome for your employees. An insolvency practitioner will be able to explain the different options available to you and your company and how each one will affect your employees.
Depending on how much trouble your company is in and its likelihood of being profitable in the future, these may include:
If your company is currently struggling but has potential, placing the company into administration may be recommended as a means of saving profitable elements of the business and protecting jobs. As part of the administration procedure, an IP will be appointed to handle the company’s affairs. Any employee retained past the first 14 days of the administration will become preferential creditors and therefore will be entitled to make a claim for wage arrears and unpaid holiday pay.
Via an administration procedure, if the business is eventually sold, employees’ current contracts will be transferred to the new company under Transfer of Undertakings (Protection of Employment) or TUPE regulations. Along with responsibility for outstanding wages, the new company will also be tasked with maintaining existing employment terms and conditions.
A CVA is an insolvency process created to enable a company in distress to renegotiate its current liabilities with creditors, which include suppliers, landlords, and HMRC. In many cases, some of the debt is written off completely while what remains is paid through manageable monthly instalments. This reduction of responsibility gives the business more chance for survival.
A CVA is often entered into by companies so that they can continue trading uninterrupted. However, part of the process may result in financial savings for the company by making its operations more streamlined. Unfortunately, this might mean that some employees will lose their jobs.
If your company is insolvent and cannot continue to operate, your insolvency practitioner may advise you to place the company into a Creditors’ Voluntary Liquidation (CVL). This will bring about the end of the company and its outstanding creditors will be dealt with. However, this also means that your employees will lose their jobs. They will then, however, have the right to claim redundancy and other statutory entitlements, which includes arrears of wages.
If you’re struggling to pay your staff wages, reach out to an insolvency practitioner. Company Doctor can help. Contact our team now on 0800 169 1536 for initial advice or to schedule a free consultation with no obligations to find the best route for you.
