If You Absolutely Can’t Make Payroll…
Sometimes it just doesn’t work out and you still can’t make payroll. If this is where you’re at, here are some tips for successfully navigating this unfortunate situation.
Talk with employees. Let them know the situation as soon as possible. No one wants to expect a check that isn’t coming. Instead of waiting until the last minute to let them know, be upfront and honest with employees about the circumstance and how you plan to fix it.
Skip your paycheck. As the owner, you should forgo your own paycheck and put that money toward paying your employees. Cutting your pay will give you some cash to work with and show goodwill to employees that can positively influence their attitudes and behaviors. If there are highly-compensated executives working for you, talk to them about receiving their pay late so you won’t have to miss paying the lower-level employees who are more likely to be living paycheck to paycheck.
Cut employee hours or positions. If you’ve done all you can and you still haven’t been able to find cash, it may be time to let people go or cut back on employee hours. This won’t relieve you of paying them for the hours already worked according to the U.S. Department of Labor, but it may help with ongoing cash flow until you have things sorted out.
Offer alternative compensation. If the cash for payroll is just a few days away, you might offer a smaller portion or alternative compensation to tide employees over. Items could include gift cards, vehicle usage, company products or services, vacation time or sick days.
Potential Legal & Tax Issues
Not making payroll can lead to unhappy employees and it may also expose you to some legal risks. Below are a few of the important issues to be aware of:
In the U.S. an unpaid employee can file a state wage claim against you and your small business. Laws vary by state. Find your state office here.
The Fair Labor Standards Act (FLSA) states that non-exempt employees must be paid at least minimum wage and overtime each week. If your business violates this law, penalties from the Department of Labor may be incurred.
Often when a small business can’t keep up on payroll, they also fall behind on quarterly payroll taxes. The IRS will impose fines and penalties if these aren’t paid on time.
Great employees are the heart of any thriving business, so it is critical to make payroll consistently. Managing your business cash flow and having a plan or external funding source available when the need arises can help you keep your employees happy by always making payroll.
Read Part 1 of What to Do If Your Small Business Can’t Make Payroll? Part 1 covers 9 ways to quickly come up with cash for payroll.
Bjorn Peterson is the Owner of Flex Business Capital. Flex Business Capital offers small businesses factoring financing to solve cash flow problems without debt, so they can focus on growth and success. Apply for funding for your company here.