Loans and Advances – Oh My!
By VICKY BROWN
One of your favorite employees comes to you (well, not your favorite, because, of course, you don’t have any favorites – right?). Well, one of your er employees comes to you and says they need money.
Something happened, or somethings wrong, or someone is having difficulty – no matter. They need money, more money and faster money than their regular paycheck. Can they have a loan, or can they have an advance.
Now, before you make a decision – there are a few really important things to keep in mind.
Let’s deal with these one thing at a time (because an advance against salary is very different from a loan). So, first off, do you want to start giving advances against future salary? Now, before you say anything, remember that if you do it for one, you have to do it for all. And on the other hand, if you don’t do it, how will you feel about turning away one of your best team members in their time of need?
Interestingly requests for salary advances may ultimately dip due to the appearance of cash advance applications. You’ve probably heard some commercials touting ‘get paid daily instead of every two weeks’ – well usually those are some type of cash advance app.
Generally these applications will give the employee money based on a calculation of what they have earned so far in the pay cycle. And yes, there are fees – and pending regulation, but these apps are available, as well as the traditional payday loans.
But, whichever way you decide – the first thing is to put it in writing. Yep, this is really something that needs to be in your handbook, because no matter which way you decide to go, you’ll need a solid policy to back you up.
Now, if you do decide to give advances, at minimum your policy should cover the following:
Eligibility – who can actually ask for an advance, can part time people, can temps, do you want the employee to have been with the company for a minimum amount of time?
What about their standing in the company? If someone is on a performance warning, can they request a salary advance? And be careful with these type of carve outs. You want to be explicit that you won’t discriminate against anyone based on protected characteristics or their position.
“…Any type of lump sum or balloon payment for an outstanding balance is prohibited – you can only deduct the amount of a single installment payment.“
How many times can someone request an advance, and in what period. You don’t want someone using advances to cover for their poor financial planning and, in effect, changing their paydate. So what type of limit makes sense to you, once in a year, twice in a year etc.
And don’t forget language around asking for an advance when the prior advance hasn’t been recouped yet. I know, it sounds like common sense, but you’d be surprised what can come up when your policy isn’t air tight.
Now we move on to the reasons for the request. Do you want to put parameters in place, maybe outline that it has to be a legitimate reason due to an unexpected or unavoidable situation – some examples include a family or personal emergency. Things that wouldn’t be covered are entertainment or vacation expenses, fines etc.
Keep in mind, a salary advance is technically a short-term loan you make to employees – so you should treat it as such. In addition to a policy, if you decide to provide advances you should have a formal agreement, laying out the amount taken, dates, when it will be repaid and how (salary deductions are the usual process), and what happens if you are unable to get the money back from payroll deductions – which could happen if the employee leaves the company, or doesn’t have enough hours to cover etc. – can you deduct the balance from the final check. Well, check in your specific state – but in California it’s a hard ‘no’.
Any type of lump sum or balloon payment for an outstanding balance is prohibited – you can only deduct the amount of a single installment payment. Then of course, you could ask the employee to write you a check to repay the outstanding balance – but it they don’t, the only thing you can do is take them to court to recoup the money. No holding their check, or refusing to pay out vacation or anything similar.
OK, onward to loans. And actually, now that we’ve discussed advances, talking about loans will be easy. Because so many of the same points hold true.
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You need a policy. It should outline if you will provide loans, and if so when and under what circumstances.
And you need a written loan agreement. Oh by the way, another thing to consider is whether or not you want to charge interest. If you do – be sure to check with your account on what, if any, tax implication that may have for the company.
The loan agreement is similar to the advance agreement – it should show who, when and how much. How it will get repaid (if it’s installment deductions from the salary, be explicit on that), and again – what happens if repayment doesn’t happen.
Speaking of repayment, all the same guidelines hold true – you can’t deduct so much from a check that it puts them below minimum wage. And again balloon payments are a no go in California. And keep in mind, while a salary advance is tied to payroll, a loan isn’t – so theoretically you could loan far more than the amount of one or two paychecks. But be careful here because it will take that much longer to get repayment.
Now, whether or not to provide either advances or loans is purely up to you – you know your company, team and culture. But generally I try to steer clients away from providing either. There are other good alternatives. For instance if you have a 401k plan, include a loan provision – that way the employee can borrow money from their own 401k bank.
That type of arrangement is much less complicated and has much less potential liability for everyone involved. And it’s something that allows the company to help, and still be protected.
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