I need to make some employees redundant but I can't afford to pay redundancies or wages because of cash flow problems. What can I do?
Well there are 2 types of actions that you can take.
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.
But what if you really do not want to go into any sort of formal insolvency i.e. there are no real debts? However, you are very sure that this is just a temporary problem but you still need to make redundancies for the good of the company as a whole and save the remaining jobs? This situation may arise where a bank overdraft has been withdrawn or a contract is taking longer to get started.
Well, you may be surprised to hear that the Redundancy Payments Office can make a "loan" to the company to pay these liabilities. How it works in practice is that the redundancy will be actually paid to the employee and the company will need to pay back the payment on a timescale to be agreed. This can be from 1 to 3 years.
Under the new 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 and will be open before the end of April. It will continue for at least three months, and can include workers who were in employment on 29th February. More details on help available to companies affected by the Pandemic
So what is the catch? The redundancy payments will be the statutory amounts up to the maximum of £525 per week- which is the salary used to make the calculation. To see the actual chart of what can be paid look at this graph. This will mean that if your employee is 43, has worked for 6 years, they will be entitled to 7 x £525 which is £3675. Also the amounts are paid direct to the employees although that isn't really a catch at all.
So how do I go about making a claim?
You need to convince the RPO that;
- You do not have the funds or other resources to make the payment.
- By receiving the assistance it will save a significant number of jobs.
- The assistance will secure the solvency of the company for the foreseeable future; and
- You will be able to repay the loan within an agreed period.
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 email@example.com
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.
Be aware that you can lay off staff without resorting to redundancies. For more information on this see the Government site.
Worried about poor cashflow? How to win new work? How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading. Please see this page here.