What happens to workers when companies decide not to pay?

It is not the first time that a Spanish company has decided not to pay its workers. Complaints lodged with the Labor Ministry about this practice have shot up since the start of the crisis in 2008. This time around it is Spanish baker Panrico, which took the unusual step earlier this month of informing its 4,000-strong workforce, based in six factories across Spain, of a "temporary" suspension of wage payments, without indicating how long it would last. The objective was to have enough liquidity to pay its suppliers of flour, eggs and sugar, so as not to interrupt production.

When a company's coffers are empty, who should be paid first: the workers or the suppliers? Without raw materials production has to be halted, but the company runs the risk of incurring the wrath of its workers as well as causing a possible strike, which would also result in the machines grinding to a halt.

Labor lawyers consulted by EL PAÍS concur that it is illegal to unilaterally stop paying workers' wages, as laid down in the Workers Statute. However, the statute says nothing about who is first to be paid when a company is having serious liquidity problems. The law only establishes a fixed order of payment when a company is in the hands of receivers — which, despite its problems, is not the case of Panrico.

The Spanish manufacturer of bread, donuts and other pastries has been on the ropes since 2006. Over the past four years it has accumulated losses of 700 million euros and had slimmed down its workforce and cut wages on a number of occasions. As of June of last year, Panrico belongs to the US fund Oaktree, which acquired the baker by capitalizing loans it granted to the company.

We are not saying don't pay suppliers — they have employees too"

The decision to cease paying wages was taken barely 72 hours after the company dismissed its chief executive officer Joan Casaponsa — who presented a viability plan on September 12 - and replaced him four days later with Carlos Gila. On September 24, Gila told labor representatives that the company is planning to lay off 1,900 employees out of the company's total workforce of 4,600 and cut wages by between 35 and 45 percent. Of the 1,900 workers to be dismissed, 756 are employed at Panrico's six factories across Spain; 483 work in technical support and sales; 600 are freelance; and 75 belong to the company's management ranks.

Workers are caught between evident concern about whether they will eventually be paid, indignation about management's unwillingness to meet with them to discuss the situation, and awareness of the fact that Panrico has been having a tough time of it for a while.

"If they won't speak to us, we will hold protests, but it is clear that without raw materials we can't produce anything; and if we don't produce, there are no revenues," says the chairman of Panrico's works committee, Leonardo Rodríguez of the UGT union. "We are not saying don't pay suppliers, because they themselves have employees and we understand we have to be flexible, but everything has its limit," he adds.

As labor lawyer José Luis Condado of Colectivo Ronda points out: "Being paid is a basic right, and has priority in the case of receivership over normal debts such as those owed to suppliers." Condado adds that there is no legal basis for Panrico to suspend wages. "This is the outcome of a given situation in which workers are the weakest link; in not paying wages the company finances itself at zero costs knowing that it will be fined, but meanwhile it solves a problem."

But, Condado explains, there is little workers can do. "If they are not owed three months' wages they can't start legal action to resolve the situation. After three months, they can ask for their contracts to be annulled, request compensation for unfair dismissal and call on a judge to declare the company bankrupt."

Another lawyer, Alex Valls, who is the partner responsible for labor cases at Baker & McKenzie, says that "a businessman is free to decide who to pay first, whether it be workers or suppliers, and later suffer the consequences." This could take the form of a fine or workers insisting they be paid with a surcharge of 10 percent. "But suppliers may have said, if you don't pay me I won't supply you, and if I don't supply you there are no products - and if there are no products, what happens to the workers then?"

Until workers are owed three months, they can't start legal action"

The problem is that Panrico has already introduced less drastic measures to cut costs without being able to resolve its liquidity problems. When there is a deterioration in a company's liquidity situation, either as a result of falling sales or lower margins - both of which Panrico has suffered - and costs exceed revenues, a company can close plants, offload parts of the business and impose cost-cutting, particularly wages. Remigio Barroso, a partner at consultant Ernst & Young who is responsible for restructuring, points out that Panrico "has already explored many of the initiatives available to it before taking this drastic measure. It has closed factories, it sold [biscuit manufacturer] Artiach, it sacked workers and it cut wages."

Barroso says that in such situations "it is important that a company be transparent by showing its figures to the works committee, by holding talks in order to try to reach an agreement with the workforce, and looking to involve suppliers in plans to ensure the company remains viable." However, this might be more feasible for smaller companies to do than large ones such as Panrico.

Jaume Llopis, a professor of strategic management at the IESE business school, says Panrico has opted "to keep its suppliers happy and assure that they can continue to supply it to keep production going, on the basis that having labor problems in such a drastic situation is less important."

Condado says his office has had lots of cases of desperate workers who haven't been paid. "They pay them small amounts every two months or so before the three months of non-payment that would allow workers to lodge a legal complaint are up," he says. "But I have never seen this way of making people work and not paying them before."

The issue is complex because payment defaults also have an impact on suppliers. In the private sector, the average time taken to settle bills in 2012 was 93 days, according to a report from the Multi-sector Platform Against Non-payment. That figure represents an improvement of five days over the previous year but it is well above the maximum of 75 days stipulated by the law.

"Payment defaults are a vicious circle," the chairman of the platform, Antoni Cañete, notes.