What To Do If You Can’t Pay Your Employees

Stressed over payroll

Employees expect compensation. At the end of each pay period, they have every right to expect a complete paycheck, delivered on time after payroll tax deductions. If a company finds itself in a situation where it cannot pay its employees, serious issues can arise.

Frustrated employees may stop working or threaten legal action. As a company’s financial issues deepen, they may consider paying employees under the table, taking out a business loan, or even declaring bankruptcy.

To ensure ongoing success, and to foster healthy relations between employees and business ownership, companies should make every effort to pay employees on time.

The Importance of Paying Employees on Time

Whenever possible, employers must strive to deliver on payment promises made to employees. If employees are told they will be paid every two weeks, they should receive payment in full by the biweekly deadline. If employees are only paid once a month, or even less frequently, it’s important that they receive funds when they expect them.

In certain cases, employees might be living paycheck to paycheck. These individuals depend on full, on-time payments to satisfy living expenses for the following month. Employees living paycheck to paycheck can face eviction, hunger, and other dire issues when payment from an employer is late, or altogether missing.

No matter the size of your company, employee compensation is strongly tied to retention. Employees can lose their motivation to stay with a company, and instead may consider joining an organization that can deliver on its payment promises.

Employers who cannot pay employees can also face legal penalties. The Fair Labor Standards Act (FLSA) protects every employee’s right to a fair wage, overtime hours, and fair compensation. Companies that do not promptly pay employees for their services violate the FLSA, and are subject to fines and penalties.

Companies that do not pay workers can also be subject to injunctions — a court order forcing them to compensate employees. Unpaid employees can request injunctions against an employer by suing them and then writing a motion for a hearing.

Injunction requests contain declarations made by employees, in which they detail their employer’s record of missed payments. When the court finds the declarations valid, an injunction is filed and employers must pay employees. If employees are still not paid, employers can face steep sanctions and lengthy prison sentences.

Each state has different laws to protect an employee’s right to fair wages. Companies must comply with state regulations, in addition to federal regulations, when compensating employees. Consult your state’s labor office for specific details on wage protection, employee payment standards, and penalties for an employer’s willful negligence.

The Consequences of Missing Payroll

Employees rely on regular, full payment from employers. Many workers schedule bill payments, vacation plans, large purchases, and other expenses around pay dates. When companies can’t pay their employees on time, employees are forced to reorganize their payments and expenses as a result.

If your company misses payroll, you may incur financial and legal consequences that quickly threaten the future of your organization.

Companies that miss a payroll risk turning employees against management. Social tension rises quickly when employees realize employers cannot fulfill their paychecks. If issues continue, there’s a strong chance that employees will take legal action.

Employees who are not paid on time, or who receive incomplete paychecks, will often seek employment elsewhere. Without employees available to perform essential company processes, your business can face serious staffing issues.

The legal, financial, and social challenges that result from unpaid employees are often too much for a business to overcome. Missed payroll can turn employees against an employer, quickly leading to the company’s downfall.

What To Do When You Can’t Pay Your Staff

You have a few options if you cannot pay employees. First, make sure you keep channels of communication open with all unpaid employees. Be honest with them about the reason why you cannot pay them, and provide a timeline for when the issue should be resolved.

You might also consider reiterating to employees that although payroll might be delayed for a few days, other corporate benefits are still active. For example, employees can still take advantage of medical services, paid time off, 401(k) match, and other benefits that the company offers.

In addition, remind employees that you still have their best interests at heart, and emphasize the ways that you’ve cared for them in the past. For example, as a medical services provider, you might have taken specific steps to keep nurses safe while on the job.

If you cannot pay employees, but you know that you’ll be able to satisfy paychecks soon, consider asking your employees for some flexibility. Ask employees if they can accept a delayed paycheck for this pay period, and be sure to let them know that all subsequent paychecks will arrive on time.

If employees see that you’re working to solve the issue, they’ll be more likely to stay and less likely to pursue legal action. Transparent communication can also help preserve trust between employers and employees, as long as payroll problems are quickly solved.

Solutions

Employees are critical assets for any company. You likely won’t be able to dig yourself out of a financial hole without your employees by your side. As a business owner or manager, make employee payment a priority. Even if you have to sell company assets or avoid paying yourself for a pay period, make sure you pay employees with whatever available cash you have.

Consider the following solutions if you cannot process employee payroll:

  • Apply for a business loan
  • Use personal funds
  • Open an additional line of credit
  • Liquidate company assets

These and other solutions can help you free up the funds necessary to process payroll.

You can also obtain funds to pay employees through invoice factoring. Working with a funding agency, you can convert accounts receivable into cash that’s immediately available for use. As long as your customers maintain favorable credit scores, you can leverage invoice factoring to maintain payroll, preserve consumer relationships, and keep bill payments on track.

Invoice factoring is different from forfaiting, where a company sells the right to accounts receivable. Through factoring, you can meet financial obligations, including payroll, without surrendering your right to accounts receivable.

Many medical transcription companies — and other medical service companies with longer wait times before customer payment — can benefit from factoring. Factoring will help your company meet payroll as you continue to sell medical supplies or medical billing services. Though different from medical receivables factoring, healthcare factoring can also help eliminate long wait times between sale and repayment.

To maintain strong business operations and keep employee morale high, it’s important to pay employees in full, on time. Consider establishing a savings fund specifically for emergency payroll, to avoid a situation where you’re unable to pay employees. 

Improving your company’s cash flow can also help you avoid future payroll issues, whether that means widening inventory, sending immediate invoices, offering shorter customer payment windows, or processing payments electronically.