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Why Employee Loans Are Not Recommended

Employee LoansAn employee has requested an advance on his pay, but we haven’t done this before and we’re hesitant to start the practice. What is recommended here?

While some organizations provide loans or advances to employees, it is generally not recommended.

Advances can be a benefit to employees and a kind gesture on the employer’s behalf, but there are two important questions to consider: Are you prepared to offer this benefit to all similarly situated employees? And are you prepared to suffer a financial loss if the employee quits before you can recover the money?

As to the first question, since this is a pretty significant perk, you wouldn’t want to offer it to one employee and not to another who is in a similar situation. Nor would you want to be inconsistent when setting limits on loan amounts or the number of times employees can receive them. If a claim of discrimination were brought against you, you would have to prove that Employee A’s circumstances were more compelling or urgent than Employee B’s and this could be very difficult. Also, consider the administrative burden if employee requests for loans or advances become commonplace.

With respect to the second question, although deductions from paychecks to repay advances are generally allowable under the FLSA (interest payments may not cause their paycheck to fall below minimum wage), state regulations apply as well. State laws can significantly limit an employer’s ability to get their money back – especially if the employee quits before the loan is repaid. Most states at least require a signed agreement, many say any deduction cannot take an employee below minimum wage, and several dictate that only a limited amount can be taken out of a final paycheck. Due to these laws, employers are not always able to recover money loaned to employees who have quit. While taking former employees to court is an option, it often costs more in both time and money than it’s worth.

For these reasons, it is a good practice to not offer loans and advances.  We would recommend a very brief policy statement in your employee handbook. However, if you really feel the need to offer an advance or loan, make sure that you get a signed agreement that details the terms of repayment, that you follow all applicable state laws, and that you are prepared to offer the same benefit to other employees if asked.
Should you have any additional questions regarding this or other employee topics,  contact CyQuest today!