I Can't pay staff wages - What can I do?

Why can I not pay my staff?

Simply put, the answer is cashflow! The company does not have enough cashflow to operate properly thus wages cannot be paid.

If this is the case, it is likely that the company is insolvent.  See this test to check.  If you are insolvent action must be taken immediately.

Remember a company can be making profit on paper but if the money is not in the bank then cashflow problems arise.   This may be short term, for example due to seasonality. However, it may also be longer term. This could be due to bad debts or a loss of large contracts. Late payments from clients could also be a factor.  This means that the company will always be trying to “catch up”.

Do I have any options to try and resolve this?

It depends on whether cashflow problems are short or long term.

Short term

If the cashflow issue is short term, explain to the staff and update them of the situation. You have got some solutions:

1. Talk to staff and explain to them the situation truthfully. Ask them to wait for payment, explaining how you believe the business will be able to pay. Hopefully, the response will be positive and aligned to support the business. You should do this as soon as you realise you are unable to pay their wages, giving them a pre-warning, so it does not become a nasty shock on pay day. It is more likely to have the situation understood and accepted, as you would be seen to be taking responsibility and being fair, giving employees the chance to find alternative plans for obtaining money to fund that periods living expenses.  A word of caution.  This is most likely to work in very small businesses of less than 10 employees.  In larger businesses staff are less close to management and are less likely to be supportive.
2. Take out a loan. This could be from a family member, friend or bank, and can be either short term or long term. The most appropriate would be to take out a short-term loan as this carries less risk for the business. It is likely in this scenario that any loan will need to be personally guaranteed so think hard about the risks.  However, this should only be the case if you can be sure the business is viable going forward.
3. Withhold payment, temporarily of course, from a non-mission critical supplier or HMRC.  This is known as robbing Peter to pay Paul and should be a last resort.
4. Look to invoice financing i.e. discounting and factoring. A factor of the cashflow issue may be late payment from clients. Invoice financing allows you to immediately receive a set percentage of your unpaid invoices. Note: a small fee is involved here but, if it means you can cover your staff wages as a result, then it is most certainly worth considering.

Long term

Ultimately, when you fail to pay your employee wages, they become a creditor.  The best option here, is to speak with a licensed insolvency practitioner about the following insolvency proceedings which may be applied:

• Company Voluntary Arrangement: Often this allows a business to continue trading without interruption. Deals are made with creditors about any outstanding liabilities – some of the debt may be written off or renegotiated to monthly instalments.
• Administration: Employees are entitled to claim for wage arrears and unpaid holidays. If the business ends up being sold through the administration process, employees’ existing contracts will be transferred over via TUPE. The new company will become responsible for handling any wage arrears and preserving the current T&Cs of employment.
• Liquidation: If the business proves unsustainable, you pay put your company into a Company Voluntary Liquidation. This ends its life. In this case, employees are made redundant. The right exists for them to claim redundancy and other statutory entitlements such as arrears of wages.

All in all, the most important thing is to communicate with employees and keep them aware. You should also be sure to get advice and seek help early on. So, talk to us to see how we can help.  If you can’t pay the wages then the business is insolvent and as a director you have a duty to the creditors.  Call us on 0800 970 0539 today.