You might be surprised to learn that it’s not uncommon for a business owner to find himself or herself in a difficult financial situation, unable to meet the obligations of paying employees’ wages.
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.
What causes issues paying staff wages?
Unanticipated drops in sales, late payments from clients and unexpected expenses can all contribute to cash flow problems, leaving a business short on funds to pay its employees.
If you cannot make a payment on time, you need to act fast. Depending on the depth of your cash flow problems, you might need to make more fundamental changes to your business.
As a business owner facing financial challenges, you have options. Working with one of our licensed insolvency practitioners, we can help you explore these alternatives and implement the one that best suits your needs. Examples might include:
Employee communication: It’s important to be honest with your staff about the financial difficulties the business is facing. They may be more understanding and willing to work with you if they are aware of these issues. You could even develop a payment plan with your employees that allows you to pay their wages in installments over a period of time. This can help ease the immediate financial burden on your business while still meeting your obligations to staff.
Seek funding: Government-backed funding schemes might help cover the cost of wages. However, when taking on additional debt, consider the long-term effects it may have on your financial situation. Addressing the underlying causes of cash flow difficulties can help a business avoid insolvency. Borrowing money may buy more time, but it does not resolve the business’s issues. Personal guarantees should be avoided because they shift company borrowing onto you personally.
Review your business expenses: Identify areas where you can reduce spending, such as renegotiating contracts with suppliers or cutting back on non-essential expenses. You might also be in a position to consider downsizing your workforce through voluntary redundancies or reduced hours.
Increase your income: If you haven’t already considered this, you could explore ways to boost your income, such as offering promotions, adding new products or services or targeting new markets.
Formal solutions to insolvency
If you find yourself in severe financial difficulties, and if you decide that declaring insolvency and entering a formal insolvency process is the right solution for you, there are still options.
A Company Voluntary Arrangement (CVA) is an insolvency procedure that allows a business to restructure its debts and repay them over time. This can help free up cash to pay staff wages while you work to turn the business around. During your CVA, your business will be protected from action by its creditors.
Entering administration also provides protection from legal action by creditors. Here your insolvency practitioner has the aim of either rescuing the business or achieving better outcomes for creditors than liquidation would provide.
A pre-pack administration involves the sale of the business and its assets to a new company owned by the existing directors or a third party. The new company can then continue trading and employing staff. However, it is important to seek advice from specialist sources when planning to move employees from one company to another as part of a business transfer.
If liquidation is necessary, your licensed insolvency practitioner will act as the liquidator and sell your company’s assets to repay creditors. After this your company ceases trading. In this scenario, employees lose their jobs but they 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.
What government help is available if you can’t pay staff wages?
If a business goes into liquidation and cannot pay its staff, the government provides financial assistance through the RPS. It is important that advice of an insolvency practitioner be sought to understand if 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 that the company’s going through.
This is a brief outline of how this process works:
- 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) and to claim redundancy must 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.
- 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.
- 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.
- 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.
- 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.
Can company directors also get financial help?
In short, yes they can – in some circumstances. If your company becomes insolvent and makes you redundant, you may be eligible for redundancy pay and the same rights as other employees. To qualify, you must demonstrate that you are an employee of the company and paid through PAYE. Directors who are made redundant may have more complex circumstances, so it is important for them to seek professional advice. One point to bear in mind is that the RPS will not pay claims to directors if they have an overdrawn loan account that is more than the claim that is being made.
When a business finds itself unable to pay staff wages, it’s a challenging and stressful situation for both the business owner and employees. However, by considering the options outlined above and seeking professional advice from a licensed insolvency practitioner, you may be able to find a solution that enables you to meet your obligations to your employees while working towards a brighter financial future for yourself and your business.