With businesses struggling and the continuing downward economic trend there may come a time where there’s not enough money in the bank to pay your staff’s wages. If this happens, you may be curious as to whether you could face legal action if you pay your employees’ wages late and wondering how badly it will damage the relationship with your workforce.
The date upon which an employee gets paid is significant – most people arrange payments to leave their bank accounts in the form of direct debits or standing orders on or around the time their wages are paid into their account. So, if wages are late or delayed, it can cause practical problems for employees such as incurring bank charges or not being able to feed their families.
Can I pay my employees’ wages late?
Because the payment date is a contractual term, failure to comply is tantamount to a breach of contract, which opens you up to an additional legal claim in a county court. Employees can sue their employers if they believe there has been a breach of their employment contract, such claims can result in compensation payments upwards of £25,000.
Whilst delays can arise in a number of ways, for example, a mistake could be made during the payroll process, staff should always be informed and kept up to date with any revised dates. To avoid repetition of the problem, steps should be taken to identify where the mistake occurred and reassure employees that it will not happen again.
If the delay is down to a lack of available funds or a cashflow shortage, employees should be notified of the situation as soon as possible giving them time to put relevant arrangements in place, such as extending their overdraft or applying for a temporary one. You should also reassure staff that you are doing everything to rectify the situation.
Inability to pay employees wages on time may be symptomatic of a wider problem requiring other action such as temporary layoffs or redundancies. Uncertainty can be particularly distressing for employees so it is important to give them as much information as you can.
What is classed as ‘wages’ for the purposes of paying employees’ wages late?
The most common types of payment that be claimed in an employment tribunal or county court classed as ‘wages’ are:
- One-off payments, such as overtime
- Holiday pay
- SSP (Statutory Sick Pay)
- Statutory maternity, paternity and adoption pay
- Notice pay
The following can only be claimed for breach of contract in a county court:
- Allowances or gratuities in connection with retirement
- Loans and advance of wages
- Redundancy payments
- Benefits in kind (e.g. private health care, gym membership, life assurance)
Can I pay my employees in cash?
You can pay your employees in cash providing you make appropriate deductions in relation to income tax and national insurance contributions. There is also a legal obligation to provide the employee with a wage slip each time they are paid, whether this is in paper form or electronic format such as a pdf file.
The law on paying wages late
As discussed above, a one-off or occasional late payment constitutes a breach of contract but this in and of itself does not entitle an employee to resign and make a claim for constructive dismissal. But where late payment of wages persist, it may amount to a breach of an express or implied term that you will pay your employees salary as and when it falls due which would then entitle them to resign and claim constructive dismissal, together with breach of contract.
A claim for breach of contract must be made in a county court and can be a slow process for the employee. They have six years from the date of the breach to make the claim.
The law on non-payment or payment of wages is set out in the Employments Rights Act 1996 (ERA), covering such matters as the requirement to inform employees the date they will be paid each month, as well as things related to the manner in which payments are to be made. The ERA entitles an employee to take their employer to an employment tribunal for an unlawful deduction of wages. Technically speaking, not paying your employees on time is classed as a deduction of wages, although this could be remedied if payment is only a couple of days late. This does not make regular delays acceptable and steps should always be taken to ensure wages are paid on time.
Initiating a claim in an employment tribunal for ‘unlawful deduction from wages’ often provides a speedier remedy for the employee, and they can still make a claim whilst remaining within your employ. Any claim must be made to an employment tribunal inside three months (less one day) from the breach.
There are several illegal deductions of wages, including:
- Delayed wage payments
- Unpaid bonuses
- Untaken holiday pay
- Unpaid or underpayment of commission
Can I force employees to take a pay cut?
To make any changes to an employee’s contract of employment, such as imposing a cut to pay, you will need to obtain the employee’s consent before you go any further. You will also need to put the proposed changes in writing.
Employees are within their rights to reject your proposal and notify you they are ‘working under protest’. This means that they continue working under their existing contractual terms pending resolution of the issue. Additionally, the employee could resign if they believed you have breached their contract. Alternatively, if your employees do not agree to pay cut terms you could end their existing contract and start a new one. This situation needs to be handled with care as mishandling contract negotiations can easily trigger claims for unfair dismissal. That said, you may be able to defend your position and claim you were acting for the good of your business and therefore it was a fair dismissal.
Consider, when drafting employment contracts, including a general deduction clause and providing an additional specific deduction clause to cover such things as return or damage to property, overpayments, or loans. You could also ask your employees to sign a written agreement to authorise deductions at a later date. This is always more difficult to do than when it is an existing term in a contract but by talking with your employees and explaining the situation helps to avoid any uncertainties in the employer/employee relationship.
The employee may consider sending you an unlawful deduction of wages grievance letter setting out their case for unlawful deduction of wages, a breach of contract, or if they have already resigned, constructive dismissal. The employee does not have to have made a grievance complaint for there to be a claim.
To claim unpaid wages the employee will need to show:
- They have notified the Advisory, Conciliation and Arbitration Service (ACAS) of the late payment of wages under the ‘early conciliation’ rules. Before an employee can take a claim to an employment tribunal they must show they have referred it to ACAS for early conciliation and obtained an ‘Early Conciliation Certificate’. ACAS provides this service for free and it is designed in order to encourage settlement of disputes without the need to pursue a claim in an employment tribunal.
- They qualify as a worker – the gov.uk website classifies a worker as someone who has a contract or other arrangement to provide work or services for a reward, the reward is for payment either money or a benefit in kind, there is only a limited right to subcontract the work to another person, they must attend work even if they don’t want to, and their work is not part of their own limited company where the ‘employer’ is the customer.
- The money owed is able to be claimed in an employment tribunal (e.g. commission, salary, bonuses, holiday pay, statutory sick pay (SSP), statutory maternity, paternity and adoption pay, and notice pay)
- The employee is entitled to the money being claimed
- You have acted illegally by paying employees’ wages late
A further consideration for the employee when deciding to bring a claim in an employment tribunal is whether an employer is facing financial difficulties which may result in the company becoming insolvent. That is because it may well be by the time the employment tribunal makes a decision the company may have already folded, meaning they would not receive any money even if they won.
What can I do if I cannot pay my staff on time?
Employers should consider whether not being able to pay employees’ wages is a short-term problem caused by something such as a seasonal downturn, or if the issues are part of larger underlying problems within the business. Perhaps there has been a general downturn in sales, bad debt or loss of a large contract. Either way if you believe the business is still viable there may be solutions that could help your business survive in the short term. However, if your failure to meet your payroll commitment is the start of your company’s insolvency, then you should be looking into the best way to close the business down.
Rescue and Recovery
Where a company is insolvent, in that it cannot pay its bills as and when they are due, a formal insolvency procedure may mitigate the businesses losses and help the company to survive. Company administration provides a company with respite from creditor pressure and can help plan for the future with a view to protecting your workforce. You might also consider entering into a Company Voluntary Arrangement (CVA) which allows businesses to renegotiate business debts whilst allowing the company to trade through their financial difficulties and pay an affordable sum each month, which is then distributed between your creditors.
If the business is not viable then it may be inevitable that your business enters liquidation. A Creditors Voluntary Liquidation (CVL) is the most often used form of liquidation in the UK. It is used to close an insolvent company where its debts have become unmanageable and the pressure being exerted by creditors is unbearable.
A company that decides to enter into a CVL generally has little to no cash flow making it impossible to continue trading. During the course of the liquidation business assets are sold and employees are made redundant. Employees who are affected by liquidation are legally entitled to claim holiday pay, redundancy pay, unpaid wages, and any payment in lieu of notice. Where there are no funds available to pay employees redundancy money, then they can claim through the National Insurance Fund, providing they fulfil the relevant criteria.
National Insurance Fund
The National Insurance Fund was set up in 1948 and established the modern welfare state. It consists of contributions from employees, employers, and self-employed people and includes interest on its investments. Today, the Department for Business, Energy and Industrial Strategy (BEIS) is responsible for making Redundancy Payment Scheme awards. Under the scheme, the employee can apply for payment of pension scheme contributions as well as unpaid wages and redundancy pay.
Employees will be entitled to a statutory redundancy payment if they have been working for a company for two or more years without a break of service. Claims for redundancy or other money owed to an employee by an employer such as unpaid wages, holiday pay or commission can be made online via the gov.uk website. Statutory redundancy pay is based on the employee’s age, the number of years’ service, and their average weekly pay over the preceding twelve weeks before the date of the redundancy notice. If the employee had been receiving less pay than usual because of ‘furlough’ the calculation is made using the figure the employee would have usually earned when not on furlough.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.