What to do if you can't pay staff wages

What to do if you can’t pay staff wages

At a certain point in its lifecycle, you may find your business in a difficult financial situation that prevents you from paying your employees. This article will explore the reasons why this can happen and the potential solutions when business owners can’t pay their staff wages. We’ll look at this from both outside and in the context of an insolvency process and whether or not the business is able to continue to trade.

How can issues paying staff come about?

A business can experience cash flow issues if its sales suddenly drop or if the company fails to collect payments from clients. These types of problems can lead to an inability to pay employees. If you’re unable to make payments on time, you need to take action immediately to restore a positive cash flow. If your cash flow problems are severe, you may need to make more fundamental changes in how your business operates.

As a business owner, you may be able to avoid insolvency by working with one of our licensed insolvency practitioners. We can help you identify alternative solutions and implement them. Examples of these might include:

Talking to your employees: When discussing the financial difficulties your business is facing with your staff, be honest and open. They may be more understanding if they are aware of the situation. To ease the immediate financial burden on your business while still meeting your obligations to your staff, we might suggest that you work with your employees to develop a payment plan that allows you to pay their wages in instalments over a period of time.

External funding: Government-backed funding schemes may be able to help cover the cost of wages. Be cautious when taking on additional debt, as this may increase financial difficulties in the long term. In order to solve a business’s cash flow problems, its underlying causes must be addressed. Borrowing money can buy time but does not fix the business by itself. Personal guarantees shift company borrowing onto your personal credit rating.

Cost cutting: Relook at your business expenses to identify areas where you can reduce spending. You may be able to renegotiate contracts with suppliers or cut back on non-essential expenses, such as office ‘nice to haves’ or business travel. If necessary, you may need to reduce hours for employees.

Generate more income: At times of crisis, looking for ways to expand could be great for business. Ideas might include developing new products or services and targeting new markets.

An insolvency process as a solution

If you decide that declaring insolvency and entering a formal insolvency process is the right solution for your financial difficulties, you still have options.

A Company Voluntary Arrangement (CVA) is a contract between your business and its creditors. It allows you to restructure your debts and repay them over a specified period of time. This can help free up cash to pay staff wages while you work to turn the business around.

If your business is in financial difficulty, placing it into administration may also protect it from legal action by creditors. The aim is for an insolvency practitioner to either rescue the company or achieve a better outcome for creditors than liquidation would provide. During this process, your business may be able to continue trading, depending on the circumstances.

A pre-pack administration is a way for your company to avoid liquidation. It involves selling its assets and trading rights to a new company owned by the directors or a third party. Employees can usually transfer from one company to another as part of a business transfer. But it’s important to seek advice from specialist sources when planning such a move.

Liquidation is also an option. Liquidation involves selling your company’s assets to repay creditors and results in the company ceasing trading. Employees may be entitled to claim outstanding wages, redundancy pay and other entitlements from the government’s Redundancy Payments Service (RPS). It may also be possible to sell the business through liquidation and enable the business to continue in a new company.

Can the government help if you can’t pay staff wages?

In short, yes they can. If your business is unable to pay staff wages and closes due to insolvency, the UK government provides financial assistance through the RPS, mentioned above. You should seek advice from a reputable, licensed insolvency practitioner to determine whether a claim is likely to be successful.

This service allows employees to claim money for unpaid wages, holiday pay, redundancy pay and pay in lieu of notice. Claims must be made with the help of the insolvency practitioner who is appointed to handle the formal insolvency process.

This is a brief outline of how this process works:

  1. Check eligibility: To be eligible for a claim, the employees must be in a contract of employment (although in some cases this may not need to be a written document). To claim redundancy must also have worked for at least two years with the insolvent employer. Additionally, they must be a UK resident or have the right to work in the UK.
  1. Gather necessary information: Before making a claim, they need to collect relevant information, including their National Insurance number, employment contract, payslips and any correspondence related to unpaid wages.
  2. Submit a claim: Visit the GOV.UK website to access the online service for claiming redundancy pay. Here, they’ll need to provide their personal details, employment information and the outstanding payments you are claiming. Any claim will need to have the correct code for that company included with it – this will be issued by the RPS to the appointed insolvency practitioner.
  3. Wait for a response: After submitting their claim, the RPS will review their application and determine the amount they are entitled to. This process can take some time. They will receive a letter detailing the outcome of their claim and the amount awarded.
  4. Receive payment: If the claim is successful, they will receive payment directly into their bank account. Note that there are statutory limits on the amount they can claim which are periodically updated, and that redundancy pay is limited to a maximum of 20 years of service.

What help can company directors get from the government?

If your company is insolvent, you may also be entitled to redundancy pay and other benefits through the RPS. To qualify, you must be an employee of the company and paid through PAYE. Director’s redundancy can be complicated, so it’s important to seek professional advice. One point to bear in mind is that RPS will not fund a claim if directors have an overdrawn loan account that is more than the claim being made.

When you find yourself unable to pay your employees’ wages, it is a challenging and stressful situation. However, if you consider the options outlined above and seek advice from a licensed insolvency practitioner, you may be able to find a solution that enables you to meet your obligations to your employees and work towards a brighter financial future for yourself and your business.

To talk to a licensed insolvency practitioner and business rescue expert about what to do if you can’t pay staff wages, contact our team on 01455 555 444 or email [email protected]

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