We are having financial issues like many companies. We are having difficulty funding our payroll and we were late last week by 2 days but made it. It doesn’t look like we will have the funding for next week’s payroll. Should I recommend to the President that we lay off all employees? At least they could apply for unemployment or look for other possible jobs.

Well, based on that one paragraph I’m not sure I can give the best answer. Instead I’ll ask another question: Why the all or nothing approach? Will you have zero money coming in, or would you be able to retain some people? How big is your business? If you lay everyone off (except, I presume, the president) is that different than shutting down the business? Is there chance of recovery in the near future?

The answers to these questions all make a difference. But as a general rule, I dislike letting people hang. And that’s what you are currently doing to your employees. If their paychecks were two days late last week, they know why. They are all stressed out about the situation.

It’s my understanding that in most, if not all states, the company not paying you is reason to be granted unemployment. So, people could already do that if they wanted to.

I think it’s unethical to let people continue working when you have no intention of ever paying them. If, on the other hand, you have the intention and evidence that strongly suggests you will be able to pay them in the very near future, that’s a different thing.

What I would do is figure out how much money you have, who your key players are, what the consequences would be of terminating everyone you can’t afford to pay and creating a plan to save some of the people and the business. That’s HR’s job: to help the business.

This will mean letting some people go (no matter what), but I think it’s better to be upfront with people: We are terminating you because we won’t be able to pay you, rather than telling them that their paychecks will be coming “soon.” Last week’s pay was 2 days late, this week’s is 4 days late, next week…

And keep in mind that you need to pay them for work already performed, so that needs to be on the list of priorities.

Basically, the situation stinks and there isn’t a lot you can do to make it better. But making people come to work when they won’t get paid makes it worse. You may find that some people prefer working with the possibility of no pay to being terminated with the guarantee of no pay.

You may also find that a more creative approach is possible. Can you offer people shares in the company in lieu of paychecks? (Check the laws in your state. Don’t know if this is legal or not, just a thought!) If your employees become owners they may be able to solve problems they can’t solve now because, why put effort into a job that may or may not pay you?

One thing is for certain–this isn’t an easy situation to be in. People are not going to walk away happy. But at least put some thought into the plan and figure out the consequences of each action.

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12 thoughts on “No Money to Pay

  1. In my state, once you become a "partner" in the business where you work you are no longer eligible for unemployment and worker's comp is no longer mandatory.
    Don't offer a partnership without explaining all of the legal considerations.

  2. Yikes! This is a tough situation for everyone involved.

    I like Evil HR Lady's approach. Be upfront with people. If you can't pay them, let them know. If you may not be able to pay them, also let them know. It's one thing to to run into financial trouble. Its another thing entirely to allow your people to feel betrayed. the latter breeds more acrimony and litigation than the former.

  3. In California, there are huge penalties for not paying on the scheduled payroll date. About the only thing worse is to not make the IRS deposits of with-held taxes. The former is just a big fine, the latter sends you to prison.

    You can ask employees to extend credit to you, but there's a bunch of laws about it, to prevent employers from taking advantage of the employees. Basically, if you can't make payroll, you close your doors, and figure out what to do next.

  4. "financial issues" "difficulty funding our payroll" "payroll late by 2 days"

    And you're writing to a blogger (sorry, no offense EHRL)for advice?

    I could make some rude comment about maybe there is a reason the company is having "financial issues." I mean, really, writing to a blogger about what to do?

    Unless you have a quick fix, such as a bank loan, to this "meeting payroll" problem (and I mean NOW, not next week or two pay periods from now, I mean NOW. So you are never late with pay again), I will repeat what the second anonymous said above: Close your doors already.

    What you have done by being late with payroll is unethical. Don't make it any worse.

    There are two unwritten rules that I think every manager, HR person, Boss, company, etc. should operate by:

    1. Do NOT mess with an employee's time-off.

    2. Do NOT mess with an employee's money.

    You have violated this second rule.

  5. I would second the comments to shut down or lay-off NOW before you have another late pay date.

    I have been in the situation of not knowing when I was going to get paid because the company had financial problems and it is VERY stressful. I also immediately lost any loyalty I felt to the company. Don't mess with people's paychecks.

  6. EHRL – you should turn on captcha on comments to avoid these Chinese spam comments that are coming in recently…

  7. Oh, right..

    Mr. "Productivity Guy" dislikes Chinese Spam.

    Some of us are on vacation and like to stare at weird characters…

    Don't oppress me, man!
    (cause, you know, I don't want to work, I want to look at weird characters)

  8. This is no joke; and I haven't click on the Chinese links. But, just in case anyone is curious as to what it is saying:

    "Chinese brides, mainland brides, Fujian brides, Gwangxi brides, Jilin brides", etc. (Fujian, Gwangxi, and Jilin are all province names in China)

    Just an FYI, in case any of EHRL's male readers are looking for mail-order Chinese brides!

  9. Definately don't mess with people's money. They have already earned it…it's theirs, not yours.

    Depending on your company needs and or cash flow, you could consider some of these other ideas:

    1. Immediate announcement of across the board pay cuts for all staff (if you're only a small amount short of making payroll). then people can always quit if they aren't willing to work for less pay

    2. Mandatory amount of Unpaid time off (sort of same as layoff, but you could stagger this…basically it amounts to a salary cut, but gives the employees time in exchange for the cut)

    3. Partial terminations / layoffs
    4. Voluntary extended leaves of absence
    5. Reduced work hours – if hourly, or, if salaried reduced work time for pay cut. (same as #2, just configured differently)

    Obviously check with lawyer before you implement, but whatever you do, communicate honestly with your folks. They can also help generate ideas that you may not have thought about.

  10. Have to agree with everyone–be up front and honest AND do your homework. I recently experienced not getting paid for a month of work already performed. I'm still waiting for that check. Prior to not getting paid, the company implemented a pay "deferment" period. I'm a loyal employee and was willing to put in more time to help the company pull through the tough time, but once my paycheck didn't show up at all, I filed for unemployment myself. It's messy and ugly, but it would've been a lot better if they were proactive and upfront..like helping people prepare for unemployment or something. I was scrambling and didn't get an unemployment check for three weeks..plus the month I didn't get paid before that…it's not fun.

  11. Shut down. A business’s first obligation is to its payroll. If that can’t be done it’s time to throw in the towel.

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