Can't Afford To Make Redundancies - Worried Directors Guide

I need to make some employees redundant but I can't afford to pay redundancies or wages because of cash flow problems due to the pandemic. What can I do?

You could enter into an insolvency procedure such as administration or a company voluntary arrangement that will allow the company to make redundancies at no cost because the Government will pay the redundancy payments from the national insurance fund. This is handled by the redundancy payments office (RPO). To see how it works in practice see our page on redundancy and CVA. The same applies in administration.

Under the Coronavirus Job Retention scheme, government grants will cover 80% of the salary of PAYE employees who would otherwise have been laid off during this crisis. The scheme, is open to any employer in the country, will cover the cost of wages backdated to 1 March 2020.  Once Furlough winds down 31st March 2021 you will have to pay for redundancies.  More details on help available to companies affected by the Pandemic

If you enter in a Company Voluntary Arrangement and agree to pay back 100p in the £1 i.e all creditors get paid in full the government will pay your redundancy costs.  So what is the catch? The redundancy payments will be the statutory amounts up to the maximum of £538 per week- which is the salary used to make the calculation. This will mean that if your employee is 43, has worked for 6 years, they will be entitled to 7 x £538 which is £3766. Also the amounts are paid direct to the employees although that isn't really a catch at all.

In order to do this you will need to submit management accounts and demonstrate why you have not been able to come up with the funds. You will also need to provide forecasts for the business. If you need help with this or want to know more please call us on 08009700539 or email help@ksagroup.co.uk

How long does it take?

Payments take 6-8 weeks so you need to make an application in plenty of time.

Can't afford to pay the staff wages?

If this is the case then the company is obviously insolvent and you need to act quickly. It may well be that you have just done a cash flow forecast and you are looking at a few months in advance. Even so, as a director, you have a duty to act and should take advice. Remember that a CVA or any other type of insolvency event allows the company to make redundancies at no cost and also any unpaid pay can be claimed by the employee.

It may well be that a liquidation or administration is the only option here.

Be aware that you can lay off staff without resorting to redundancies. For more information on this see the Government site.

Categories: Turnaround, What is a CVA or Company voluntary arrangement?