Can’t pay your staff’s wages? Here’s what you should do

In the ever-changing business landscape, unforeseen circumstances can sometimes lead to financial challenges for companies, leaving directors in a difficult position where they are unable to pay their staff’s wages. This scenario can be distressing and overwhelming for both the directors and employees involved. However, by taking prompt action and adopting a transparent and empathetic approach, directors can navigate through this crisis while minimising its impact on their workforce and maintaining their integrity as leaders.

1. Communicate openly and transparently. The first step in managing a payroll crisis is to communicate openly and honestly with your staff. Call for an urgent meeting to address the situation, explaining the reasons behind the financial challenge and its impact on the company’s ability to meet payroll obligations. Ensure that your communication is transparent, without sugar-coating or making false promises. Emphasise your commitment to finding a solution and provide a platform for employees to voice their concerns or ask questions.
2. Seek professional advice and explore options. To effectively navigate a payroll crisis, it is crucial to seek professional advice from accountants, lawyers, or business advisors who specialize in financial restructuring, such as insolvency practitioners (IPs). These experts can evaluate your company’s financial situation, explore potential funding options, and offer guidance on legal obligations and best practices. They can also help you assess alternatives such as restructuring, cost-cutting measures, or seeking external financing to bridge the financial gap.
3. Prioritise critical expenses. When faced with a payroll crisis, it may become necessary to prioritise critical expenses to ensure the survival of your business. While paying employees is a legal and moral obligation, you may need to make difficult decisions regarding other expenditures. Analyse your expenses meticulously, focusing on essential operational costs and critical suppliers. By prioritising strategically, you can optimise your limited resources and allocate them where they are needed the most.
4. Explore temporary solutions. Consider temporary solutions to address the payroll crisis while you work on a long-term strategy. If you’re confident that this is only a one-off problem, you may be able to pay your staff’s wages from your own pocket as a means to temporarily plug the hole. You could also discuss with your employees the possibility of implementing reduced working hours, temporary layoffs, or unpaid leave. Be open to negotiating with your staff, explaining the temporary nature of these measures and seeking their input on finding practical solutions that can benefit both parties.
5. Communicate with stakeholders and creditors. Maintaining open lines of communication with stakeholders, including creditors, is vital during a payroll crisis. Reach out to your lenders, suppliers, and partners to explain the situation and discuss potential alternatives or arrangements. By proactively addressing your financial challenges, you demonstrate your commitment to finding solutions and foster goodwill with your business partners, increasing the chances of receiving their support.
6. Consider emergency funding. There are lots of options to consider in terms of emergency funding to cover staff wages, such as short-term loans, business credit cards, overdrafts and asset-based funding. However, it’s important not to borrow more money or provide personal guarantees if this has become a recurring problem, as this would suggest that there are underlying problems that are impacting the business’s profitability.
7. Foster a culture of trust and transparency. During times of crisis, maintaining employee morale and trust is crucial. As a director, lead by example, demonstrating transparency, empathy, and resilience. Keep your employees informed about any progress, developments, or potential setbacks. Encourage open dialogue and create a supportive environment where employees feel heard and valued. By fostering a culture of trust, you can rally your team together and navigate the crisis collectively.

Experiencing a payroll crisis is undoubtedly a challenging situation for any company director. If you find yourself in this situation, you should receive professional help from an insolvency practitioner (IP), who will help you get your finances back on track and ensure your staff can be paid on time in the future. If you’d like to find out more, contact Voscap today on 020 7769 6831, or email help@voscap.co.uk, to speak to one of our business recovery specialists.