Is It Illegal To Pay Employees Late?

Employers will want to avoid causing inconvenience and distress to their workforce by paying wages late. But what if your business is going through financial difficulties, and cashflow problems are impacting your ability to pay wages on time – could you face legal action if you pay your employees’ wages late?

The law on paying wages

Getting paid for work done is a fundamental employment right.The law on non-payment or payment of wages is set out in the Employment Rights Act 1996 (ERA), covering such matters as the requirement to inform employees of the date they will be paid each month and the manner in which payments are to be made.

Failure to pay someone the correct amount, or to pay them on time as prescribed in their employment contract, can constitute an unlawful deduction of wages and a breach of contract. Unlawful deductions of wages can include:

• Delayed wage payments
• Unpaid bonuses
• Untaken holiday pay
• Unpaid or underpayment of commission

While a one-off or occasional late payment would constitute a breach of contract, this in and of itself does not entitle an employee to, for example, resign and make a claim for constructive dismissal.

Indeed, if payment is made a couple of days late, this would usually be seen as the matter having been remedied.

However, where late payment of wages persists, 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 bring a claim for unlawful deduction of wages, or in extreme circumstances, to resign and claim constructive dismissal, together with breach of contract.

 

Breach of contract claims

An employee’s wage payment date should be stated within the employment contract. Failure to comply with this contractual term would therefore be tantamount to a breach of contract. 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.

A claim for breach of contract must be made in a county court within six years from the date of the breach.

 

Unlawful deduction of wages claims

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.

 

What are 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:

• Commission
• One-off payments, such as overtime
• Salary
• Bonuses
• 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:

• Pensions
• Allowances or gratuities in connection with retirement
• Expenses
• Loans and advance of wages
• Redundancy payments
• Benefits in kind (e.g. private health care, gym membership, life assurance)

 

What if the late payment was an error?

If you are made aware of an issue with late payment of wages, you should act quickly to investigate and resolve the issue. This will help to avoid any potential workforce morale issues and avert the risk of legal complaints and claims against you to recover the outstanding amount.

If the late payment was the result of an error, for example during the payroll process, affected employees should be kept informed and advised of any revised dates.

To avoid repetition of the problem, steps should also be taken to identify how the mistake occurred and how this has been addressed, and to reassure employees that it will not happen again.

 

Can I pay my employees’ wages late?

Employers will want to avoid paying their workers late, not only because it is against the law, but also due to the problems it is likely to cause for affected workers.

The date 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 provide for their families.

If you are considering delaying wage payment due to a lack of available funds or a cashflow shortage, affected 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.

The inability to pay employees wages on time may be symptomatic of a wider problem requiring other actions such as pay cuts, 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 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. Taking advice will help you consider all of the options in your circumstances. For example, you may be considering the following:

 

Can I force employees to take a pay cut?

If your business is in financial difficulties, it is generally advisable to be open and honest with your workforce, particularly if the result will be cuts in pay. While they understandably are not likely to be happy about a pay cut, employees are more likely to accept a reduction if you explain the circumstances.

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, or you risk legal complaints. The proposed changes should also be put in writing, typically by updating the employee’s contract terms.

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 (‘fire and rehire’). This situation needs to be managed carefully, as mishandling contract negotiations may 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. Taking professional advice will ensure you have considered the options and risks associated with making changes to employee pay.

 

Can I pay my employees in cash?

You can pay your employees in cash provided 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.

 

Contractual provisions for wage deductions

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.

 

What will the employee need to show for an unlawful deduction claim?

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.

Initiating a claim in an employment tribunal for ‘unlawful deduction from wages’ often provides a speedier remedy for the employee than the county court, and they can still make a claim whilst remaining employed by you. Any claim must be made to an employment tribunal within three months (less one day) from the breach.

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.

Insolvency & wage payments

If the inability to meet your payroll commitments is connected to your company’s insolvency and possible closure of the business, consider the following:

Rescue and Recovery for insolvent companies

Where a company is insolvent, and cannot pay its bills as and when they are due, a formal insolvency procedure may mitigate the business’s 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 for redundancies

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.