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It’s not uncommon for an employee to ask for an advance on their paycheck or a loan. If this issue arises in your business, it might create an uncomfortable situation, and you may be hesitant to start this practice. Should you loan money to your employees?
While some organizations do provide loans or advances, we generally don’t recommend the practice. Advances can be a benefit to employees and a kind gesture on behalf of employers, but there are two significant 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 recoup 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. 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 – particularly 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. (View New York’s law here.) 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, we recommend against loans and advances and have a very brief policy statement on the subject that can be added to your 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.
For more information on how GTM advises clients on best business practices, contact us at (518) 373-4111.
