What can I do when I cannot pay my staff wages?

If you’re unable to settle your employees’ wages promptly, take it as a warning that your company’s cash flow is precarious and may be technically insolvent. A steadfast workforce is crucial for any business, so prioritising timely and complete wage payments is essential. If you find yourself in this situation, there are available alternatives. Discover more below.


What are your options when you cannot afford your employees’ salary payments?

Failing to pay your staff on payday could spell disaster for your business. A reliable workforce is vital for ongoing operations. If you can’t meet wage commitments, your ability to take on new work and fulfil orders may be jeopardized. To maintain your business’s viability, it’s crucial to be a dependable employer by ensuring timely and full-wage payments. If this becomes challenging, here’s what you should do.


What to do if you can’t pay staff wages this month

As soon as you realise you can’t pay your employees’ wages in full, prioritise giving them advance notice. While this won’t make them less upset, it avoids surprising them on payday and allows them to make alternative plans. Expect a possibly hostile response, as your financial troubles may not be their primary concern. They’re likely worried about meeting their own bills without their monthly salary.

Ease the difficult conversation by providing a timeframe for payment. If a definite date isn’t possible, inform them about the likelihood of the situation continuing into the next month’s payday.

Even if employees accept non-payment as a one-off, it can’t continue indefinitely. Eventually, they may refuse to work without payment, worsening your company’s financial situation. The lack of funds for payroll signals urgent financial concerns that need immediate attention.


Back to basics: Uncover the root of your financial problems

Start by uncovering why you can’t pay your staff this month. Has demand for your product or service fallen, impacting your turnover? Maybe unexpected expenses have drained your cash reserves. Is it because a client (or clients) hasn’t paid on time, causing a ripple effect on your cash flow? Late payment is common in many industries, and while it’s frustrating, it can be fatal for a small business without the cash flow to endure until payment arrives.


Your options: Invoice financing

If clients’ late payments are causing your current concerns, consider invoice financing to avoid future issues. Invoice financing, covering both factoring and discounting, lets you access a portion of your unpaid invoices straight away. This maintains a steady cash flow and offers assurance on when you’ll receive payment for your work. While there’s a fee involved, if it ensures timely staff payments and smooth business operations, it’s worth exploring.


Your options: Formal insolvency

When your business is insolvent, as a director, you must prioritize the interests of creditors over the company itself. Failing to pay your employees makes them creditors, and their well-being must be safeguarded. Consult a licensed insolvency practitioner promptly to ensure you meet your duties as a limited company director and strive for the best outcome for your employees. The practitioner will guide you through available options and their impact on your employees, taking into account your company’s distress levels and its potential profitability in the future.


I. Administration and TUPE:

If your struggling company is fundamentally viable, opting for administration may be advised to save profitable aspects and safeguard jobs. An insolvency practitioner oversees the process, and employees retained beyond the initial 14 days become preferential creditors, eligible to claim for overdue wages and unpaid holidays.

If the business is sold during administration, existing employees’ contracts transfer to the new company under Transfer of Undertakings (Protection of Employment) or TUPE regulations. The new company takes responsibility for wage arrears and upholds existing employment terms.

II. Company Voluntary Arrangement (CVA):

A CVA is an insolvency process allowing a struggling company to renegotiate debts with creditors, such as suppliers, landlords, and HMRC. Some debt may be written off, with the remaining amount paid in manageable monthly instalments, enhancing the business’s survival prospects.

While the company continues trading, entering a CVA might not directly impact employees. However, the process may involve financial savings by streamlining operations, potentially leading to staff redundancies.

III. Liquidation

If your company’s financial troubles make it unsustainable, your insolvency practitioner might suggest a Creditors’ Voluntary Liquidation (CVL). This process concludes the insolvent company, addressing outstanding creditors. What about your employees?

With the formal liquidation, the business ends, resulting in employee redundancies. However, they retain the right to claim redundancy and other statutory entitlements, including arrears of wages. 

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How can Vanguard Insolvency help?

If you’re unable to pay your staff wages, contact an insolvency practitioner. Vanguard Insolvency has over 100 licensed practitioners across the country, ensuring you’re close to expert help. Call our team today for initial advice or to schedule a free, no-obligation consultation.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.