All employees are entitled to payments, making salaries the biggest expenses for companies. Although it isn’t uncommon to miss payroll, businesses, both big and small, should avoid missing payroll, no matter what. Doing so can lead to unsatisfied employees who will leave for other opportunities on top of a number of penalties and lawsuits. Here is what happens if you miss payroll and how you can get prevent it from happening.

What are some common reasons why businesses miss payroll?

Businesses that miss payroll tend to either be smaller companies that operate on a cash basis or larger companies that have suffered a recent catastrophic loss.

Smaller companies are at more risk of missing payroll if their income comes from large periodic payouts from contracts, rather than from predictable or measurable monthly sales or other sources. Losing a big client or having a client default on payments can interrupt the company’s cash flow and make it difficult to make payroll.

Larger companies are usually only at risk if they suffer a crushing blow, like losing a “bet-the-company” lawsuit or a major economic downturn destroys the heart of their business. This can also happen in a large partnership (think large law firms of 1,000+ lawyers and multiple offices) when too many partners leave all at once and take their clients with them. Of course, large companies’ resources for covering payroll in the event of a catastrophe are usually greater.

What are the consequences of missing payroll?

The consequences of missing payroll are severe so companies should do everything they can to avoid it. Employees will almost certainly sue for damages under federal and state employment laws. Additionally, some states, such as California, hit employers who miss payroll with heavy statutory penalties for everyday payroll is late for every employee.

Then, there are the tax consequences. Missing payroll means missing payroll taxes. The IRS will also hit the company with penalties and possible enforcement action.

What steps can you take ahead of time to avoid missing payroll?

As soon as you realize you may come up short on payroll, dig deep for any possible source of funds to cover it. Because missing payroll is so dire, companies facing a shortfall should pay employees by any means necessary. Owners need to consider options like digging into personal funds, taking personal loans, and cutting their own salaries until caught up. If the company sells products, it might be wise to have a major 50% off sale on everything to bring in the short-term cash. Even a high-interest hard money loan against the business will cost less in the long run than missing payroll.

What should you do if you are in a pinch?

The first thing you need to do is consider telling your employees as soon as possible. If you cannot pay them, you should give them as much time as possible to find new employment elsewhere.

It is not advisable to pay only partial payroll. Your business will incur the same lawsuits and tax consequences as if you paid nothing.

How can business owners remediate the consequences?

The best and most important thing to do is to hire an employment lawyer to help guide you through what comes next. The consequences of missing payroll are not something an employer can, or should, navigate alone.

If you are facing the possibility of missing payroll, contact Hackler Flynn and Associates for assistance.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.