Contract workers waiting months for payments as SME cash flow dries up

New data has revealed that 38% of UK SMEs are now taking over 90 days to pay contract staff, as the growing late payment crisis trickles down to impact gig economy workers.

The research was carried out by the embedded finance and payment solutions provider, Sonovate. According to the results, two in five UK SMEs now struggle to pay their contract workers on time as a result of cash flow problems within their businesses.

The problem has worsened due to the current economic crisis. As the cost of doing business rises, contractors are being left by the wayside. Identical Sonovate research conducted in summer 2022 found that just 27% took longer than 90 days to process payments.

Sonovate experts are now warning that more must be done to safeguard small businesses and gig economy workers from the threat of unpaid invoices, and prevent UK SMEs from losing access to a hot-bed of self-employed talent.

Employment experts call for greater worker protections

Dealing with delayed payments is a particular struggle for contract or agency workers. This group tends to be hired on temporary, part-time or zero-hours contracts that lack many of the financial protections afforded to full-time ‘employees’, such as holiday pay.

Maternity pay and paternity leave is also severely downgraded depending on an individual’s employment status – making it much more difficult for contracted parents to afford child care.

Freelancers and sole traders can impose late fees on a due invoice once the client has missed their established payment terms. They also tend to have multiple clients, meaning they are less reliant on a singular fee to cover their living costs.

In contrast, contract workers tend to rely on one client as their sole source of income. Under the Late Payment of Commercial Debts Act 1998, they have a statutory right to claim interest from their clients or agents who don’t pay on time. But this can take months to sort out – a length of time many contract staff cannot afford to wait out.

Two years ago, the Labour party pledged to erase the – often confusing – distinction between employee and worker. At the time, it said it would “create a single status of ‘worker’ for all but the genuinely self-employed”.

Earlier this week, however, it reduced the pledge to a “consultation”, igniting criticisms from some commentators, who accused the party of rowing back on its promises.

Richard Prime is co-founder and co-CEO of Sonovate. Commenting on the “chaotic cash flow ripples across the economy”, Prime said: “it is the UK’s growing army of contractors that is facing the brunt.

“They are having to wait over three times as long as they should have to to get paid for the services they provide. This must change, and quickly.”

SMEs caught in the middle of late payment cycle

It’s not just contract workers who are suffering as a result of the late payment row. 63% of the SMEs surveyed say that clients or customers falling behind on payments has a negative knock-on impact on their ability to pay contract workers on time.

That figure has also grown substantially since the same period last year, when exactly half expressed the same opinion. This suggests that the current economic downturn is to blame, as the cost of living crisis weakens consumer appetites for slimmed-down profit margins.

Even large corporations are struggling. Last month, both Etsy and Amazon became embroiled in a well-publicised row with merchants, as it was revealed that the two platforms were withholding funds from sellers.

Many store owners reported that, without money coming in, they were unable to settle household bills, buy new stock, or even pay wages.

Statutory payment obligations state that, unless an alternative payment arrangement is agreed by both parties, any UK business must pay a supplier within 30 days of receipt of an invoice for any goods or services provided.

These rules are applicable to all supplier types. However, persistent tardy payments are especially detrimental to UK SMEs. As the middle man in the supply chain, they are the group most likely to be squeezed financially.

The issue then causes a domino effect. Over a third of SME respondents to the Sonovate survey now say payroll issues have caused them to lose contract workers as a result of not being able to pay them promptly enough.

How not to be a freeloader when hiring a freelancer

The crisis comes at a time when contract working has never been more popular, threatening the UK’s burgeoning freelancer economy. Recent data published by IPSE shows that the number of self-employed people working in the UK has grown by more than 150,000 in just 12 months.

Hiring contract workers brings lots of benefits for SMEs. Shortened recruitment process and flexible contract types means they are a cost-effective solution to plug labour gaps.

For employers not wanting to lose out on self-employed talent, Sonovate also asked small business owners how they had approached managing budgets to ensure they could afford all due or outstanding invoices.

The results show that 51% of SMEs suggest adopting fintech tools, such as payroll or accounting tools, as a way to become more cost-efficient.

When asked where they would look for a payday loan, 40% of SMEs agree it is easier to access finance from a fintech lender than a high-street bank.

Both of these options, Prime warns, will become increasingly necessary as long as overdue payments continue to become normalised.

“It is not acceptable to suppose that, as the population of contract workers continues to expand, businesses will be able to get away with slow payroll,” he adds.

“Talented contract workers are hard sought, hard to retain, and will vote with their feet. SMEs need greater control of their payroll capability to ensure the best people that work for them stay close and continue to add value.”