Cannot Afford To Pay Employees National Minimum Wage

If you cannot afford to pay employees the national minimum wage, that is a clear sign your company is insolvent. Rising costs, falling revenue, and cash flow problems may all contribute to a situation where paying the national minimum wage feels unaffordable. But failing to meet this legal obligation is not just a financial issue; it carries serious legal and reputational risks.

Non-Negotiable Legal Duty

The national minimum wage (and national living wage for workers aged 21 and over) is set by law and reviewed by the government. Employers are legally required to pay staff at least the applicable hourly rate, regardless of the company’s financial position and solvency. There is no option other than to lawfully comply.

If you underpay your staff, even unintentionally, HMRC can launch an investigation to address the matter. You may be ordered to pay arrears going back up to six years, with interest, and face penalties of up to 200% of the underpayment (capped at £20,000 per worker). Worse still, HMRC may publicly name and shame your company, which could potentially cause lasting reputational damage.

Affordability Is Not A Defence

Some business owners argue that they simply don’t have the money. But HMRC and employment tribunals do not consider financial hardship a defence. If you cannot afford to pay the national minimum wage to all your employees, this signals a deeper problem with the company’s solvency and future potential viability.

Continuing to trade while failing to meet this obligation can also expose directors to further risks. In a future insolvency, knowingly paying employees less than they are entitled to might be viewed as wrongful trading or a breach of fiduciary duty.

You therefore need advice from an insolvency practitioner.

What Are Your Options?

If you’re facing company cash flow issues and cannot afford to pay staff the national minimum wage, it’s time to take act decisively.

Being in a position where you cannot pay the staff wages will leave a company in a precarious position, so here are some available options to consider:

Open a Dialogue with Staff

Be honest with employees about the financial situation. While you cannot legally pay less than the minimum wage, you may be able to discuss temporary reductions in hours or unpaid leave (by agreement only), or even consider redundancies, handled carefully and lawfully.

Seek Professional Advice

An accountant, insolvency practitioner, or business advisor can help you review your finances and consider restructuring or cost-saving measures. If insolvency is on the horizon, early advice can make a big difference.

Consider a Formal Insolvency Process

If you are trading at a loss and cannot pay employees what they are owed, even the national minimum wage, voluntary liquidation or administration may be a route for your company to consider going forward. Employees in such cases may claim unpaid wages, holiday pay, and notice pay from the Redundancy Payments Service.

Access Emergency Finance

Short-term loans or invoice financing might bridge a temporary cash flow gap. But borrowing to pay wages when there is no prospect of recovery may only delay the inevitable of insolvent liquidation.