I cannot afford to pay my staff’s wages

A stable workforce is at the heart of any business and if you’re struggling to make payroll, you have a serious problem. If you’re unable to pay your staff then it’s also likely that you’re struggling to pay bills from suppliers, HMRC and other creditors when they become due, and at that point, your business could be technically insolvent. Not being able to pay wages is one of the most common reasons directors contact us and it’s often the trigger that forces them to address problems they’ve been struggling with for months.

“Not being able to make payroll is one of the most common reasons directors contact us, and it’s often the tipping point that forces them to confront the company’s financial position. The important thing at this stage is not to panic; there are options, but which ones are available depends on whether this is a temporary blip or a deeper problem. That’s the first assessment we make.”
— Julie Palmer, Partner, BTG Begbies Traynor

What happens if you can't afford employee wages?

If you’re facing a situation where you’re company is not able to make all its scheduled payments, you should prioritise paying your employees if at all possible. While you may be able to extend your payment terms with a supplier or negotiate a Time to Pay Arrangement with HMRC, failing to pay your staff on time could spell disaster for your business. 

It’s worth thinking about how your staff will react if they’re paid late or not at all. After all, if your staff can’t rely on you to pay their wages on time, can you really expect them to fulfil your orders and carry out the work as required? Some may understand the situation, but others may down tools and even leave or threaten to take legal action against you. 

However, while you should always do everything you can to pay your staff, there may be times when that simply isn’t possible. Many of the directors we speak to have been juggling payments for several months before the wage issue tips them into seeking advice. The missed payroll is rarely the beginning of the problem.

If you find yourself in a position where you’re unable to pay your staff their wages, you should inform your employees at the earliest possible opportunity. Telling them well in advance will give them more time to think about how they’re going to pay their bills and put alternative plans in place. They’re certainly not going to be happy with the news, but at least it won’t come as a nasty shock on payday.

Before you tell your team, put a plan in place so you can explain what you’re going to do to resolve the situation, and ideally, you should have a clear timeline for when they can expect to be paid. 

What are your options if you’re unable to pay your staff?

When it comes to resolving the problem, your options depend on whether it’s a one-off, short-term problem or whether it’s more indicative of a long-term decline. 

It’s likely a temporary cash flow issue if:

• You can point to a specific cause such as a a late-paying customer, a one-off expense, or a seasonal dip
• The underlying business is profitable and generating revenue
• You expect the situation to resolve within one or two pay cycles
• This is the first time you’ve struggled to make payroll

It’s likely a sign of insolvency if:

• You’re regularly struggling to pay staff, suppliers, or HMRC on time
• You’re delaying one payment to make another
• The company’s debts are growing faster than its revenue
• You’ve missed payroll more than once, or you’re relying on personal funds to cover it

“The directors who call us about unpaid wages often tell us they’ve been juggling payments for months. Missing payroll is rarely the first sign of trouble but it’s usually the point where the company's financial problems become impossible to hide. If you recognise that pattern, it’s time to get advice.”
- Julie Palmer, Partner, BTG Begbies Traynor

Options if it’s a short-term, one-off problem

If the inability to pay your staff is the result of a temporary cash flow problem, such as a late paying customer or unexpected expenditure, you should explore your options to generate a quick injection of cash. These could include:

• Emergency Funding - There are lots of options to consider, from short-term business loans to business credit cards, overdrafts and asset-based funding. However, it’s important not to borrow more money or provide personal guarantees if there are underlying problems that are impacting the business’s profitability.
• Invoice Finance - If long payment terms and late payments are a problem in your industry, invoice financing could be a reliable way to create a steady stream of cash flow. It allows you to receive a set percentage of an invoice’s value immediately without having to wait for a customer to make the payment. The fee for this kind of agreement will dent your profitability but it will make it easier to pay your staff and meet other liabilities on time.
• Offer early payment discounts to debtors - If you’re unable to raise finance quickly and expect the problem to be short-term, you could contact your debtors to offer them payment discounts if they make payments immediately. You should also think about how you can tighten up your accounts receivable process to get more cash in the business. You could reduce your payment term from 60 days to 30 days, charge interest on late payments and offer early payment discounts.
• Pay the staff yourself - If you’re confident that this is a short-term cash flow blip, you could lend the business the money to pay staff from your personal finances. Your director’s loan account will be in credit and the company can pay you back when its cash flow position is more stable.

Options if it's a long-term problem and the business is in decline

If you’re regularly struggling to pay your staff and are having to rob Peter to pay Paul, there is a high chance that your business is insolvent. At this point, we strongly advise you to speak to a licensed insolvency practitioner to help you meet your obligations as a director and protect the interests of all your creditors, including your employees.

There are several options available to you depending on the future viability of the business and the distress levels you are experiencing. In our experience, a significant proportion of directors who call us about unpaid wages are running businesses that are viable but overburdened by debt. When we restructure the debts, the cash flow improves and the wage problem resolves itself. Formal insolvency options include:

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a structured repayment plan that lets struggling businesses repay their debts to their creditors over time. It’s often the case that debts to suppliers, landlords, HMRC and other unsecured creditors can be substantially reduced, with manageable monthly payments made over a typical period of 3-5 years. As long as the payments are made every month, the company will be able to trade without interruption and there will be more cash flow available to pay staff. 

“A CVA works best when the business is fundamentally viable but carrying debts it can’t service. If the inability to pay wages is caused by legacy debts to HMRC or suppliers dragging down cash flow, a CVA can restructure those debts into affordable monthly payments and free up cash to pay your staff going forward. But it only works if there’s enough revenue coming in to sustain both the CVA payments and the ongoing wage bill.”
- Julie Palmer, Partner, BTG Begbies Traynor

Administration

If the company is struggling but ultimately viable, going into administration can give you the chance to restructure and save jobs while the business is protected from creditor pressure and legal action. Any employees kept on past the first 14 days of the administration will be able to claim for wage arrears and unpaid holidays. If the business is eventually sold through an administration procedure, the employees’ existing contracts will be transferred to the new company and it will be responsible for any wage arrears.

“Administration is the right option when the business needs immediate protection from creditor pressure while a rescue plan is put together. If a creditor is threatening a winding-up petition and you’re worried about losing staff in the meantime, administration puts a moratorium on enforcement and gives you breathing space. Employees kept on past the first 14 days become expenses of the administration, meaning their wages are paid as a priority.”
- Julie Palmer, Partner, BTG Begbies Traynor

Creditors' Voluntary Liquidation (CVL)

If the business is no longer viable and closure is deemed to be the most appropriate route forward, a Creditors’ Voluntary Liquidation (CVL) provides an orderly way to close the company and ensures your employees can access the Redundancy Payments Service (RPS) for unpaid wages, holiday pay, and statutory redundancy. 

“One of the first things we explain to directors is that a formal insolvency process actually protects their staff. Many directors assume that entering liquidation is the worst outcome for their employees, when in reality it’s the route that gives them the quickest access to the financial support they’re entitled to.”
- Julie Palmer, Partner, BTG Begbies Traynor

For full detail on what employees can claim and how the process works, see our guide to employees’ rights in liquidation and administration.

What we typically see

A director of a small manufacturing company contacted us after missing a second consecutive payroll. They had twelve staff and had been using personal savings to cover shortfalls for several months. At the time of contacting us, the company owed approximately £18,000 in wage arrears and £45,000 to other creditors. 

After reviewing the company’s finances, we identified that the business was generating enough revenue to be viable but the problem was a combination of legacy HMRC debt and an expensive commercial lease draining cash flow. We proposed a CVA that restructured the HMRC debt into manageable monthly payments and negotiated a rent reduction with the landlord.  The CVA was approved, the wage arrears were cleared within six weeks, and the company continued trading with all twelve staff retained. The director told us that the biggest mistake they made was trying to fix it alone for six months before calling.

What to do now if your company cannot pay its staff

Here are our insolvency practitioner's top tips for what you should do if your company has found itself unable to pay employee's salaries:

1. Assess whether your company's financial problems are temporary or structural. Can you point to a specific, fixable cause? Or has this been building for months, slowly getting worse? Your next steps depend on the answer.
2. Don’t use personal funds to prop up an insolvent company. If the business is insolvent, lending it your own money doesn’t fix the underlying problem and puts your personal finances at risk. It also creates a directors’ loan account entry that complicates matters in insolvency.
3. Talk to your staff before payday. If you know you can’t make the next payroll, tell your team as early as possible. Honesty is difficult but it’s always better than silence on payday.
4. Keep records of everything you owe. This means exact figures for each employee including unpaid wages, accrued holiday, notice periods, length of service. You’ll need this information whatever route you take so having it readily available is recommended.
5. Speak to a licensed insolvency practitioner. Whether the business can be rescued or needs to close, getting professional advice early gives you the most options and the best outcome for everyone including your staff.

How BTG Begbies Traynor can help

If you’re struggling to pay your staff, we understand how stressful that feels, in fact,  it’s one of the most common reasons directors contact us. But rest assured, there are options available.

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We’ll explain your position, help you understand what your staff are entitled to, and guide you through the next steps.