Employee Loans

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  • April 16, 2024

We are living through a cost of living crisis and employees are facing increases to all their utilities bills, rent and mortgage payments are going up and they struggle to make ends meet from one payday to the next.

So, in amongst all this, employees are turning to their employers for either an advance against wages or even a loan and there are 2 opposing points of view about whether employers should be advancing against wages or, in extreme circumstances giving a loan to employees.

It is important to make a distinction between an advance against wages or salary which tends to be in response to an immediate cash flow crisis and the monies are repaid quickly – often on the next pay run – as opposed to loans which may be repayable over 12 or 18 months or even longer.

There are 2 sides to this argument.

Argument against giving employee loans

Your employer is not a bank and if an employee is short of cash or in need of a loan, that’s what banks are for.

Also, the financial difficulties that employees are facing are also being faced by employers – they have to pay wages and have seen significant increases in minimum wage and they also have to pay utilities, rent, rates, insurance, fuel. Also, many employers have seen their income reduce and are dealing with the double hit of falling income and rising costs. Being blunt, employers also have cash flow issues.

There are compelling arguments for a Company to say “no” if an employee asks them for a loan. Firstly, in some situations where the loan is interest free, there are tax implications but also, if you say “yes” to one employee, you are possibly on a slippery slope because unwittingly, you may have opened the gates for others to ask.

You give one employee a loan and then another asks for a loan – but on this occasion you say “no”. Whilst, it is entirely at the employer’s discretion, it is also opening the door for allegations of unfair treatment, even discrimination – it all gets quite divisive.

Some employers give employees a loan and then attach some sort of “gagging clause” to it – in other words – don’t tell your colleagues. Sounds fine but in practice, how easy is it to enforce and also, what are the consequences of a breach. However, you look at it, the whole situation can get quite messy.

It is also quite bizarre that employers agree to an employee having a loan but there’s no paperwork in place – so, they’re potentially making deductions from salary for repayment with nothing in writing from the employee, not to mention the scenario where either the employee leaves and the outstanding balance is greater than the amount of money owed by the employer. Also, it is possible that the employee goes off sick and may only be entitled to Statutory Sick Pay and therefore, the amount to be repaid may be greater than the employee’s pay for the month.

Also, it can blur the lines in the relationship – you’re their employer not their debt counsellor – and it can be dangerous to get too personally involved.

Arguments for giving employee loans

It could be the sign of a caring employer than when an employee falls on financial difficulty, the employer steps in and either advances against salary or agrees to a loan for the employee.

If the employee has financial issues and the employer wants to help, there is nothing to stop them. One argument is that if an employee is experiencing financial difficulty and the employer supports them, this might help with retention because under different circumstances, the employee might be tempted to look for another job which pays more.

The employee may also feel a debt of gratitude to the employer – but how long will that last?

Some employers are cash rich and can afford to do this which is fine but there are some absolute ground rules

  1. Document the arrangement and agree a repayment period and also get employee authority for deductions from salary.
  2. Be very clear that in the event of termination of employment, the employer can deduct from the outstanding balance from any final monies owing to the employee and in the event that there are insufficient funds, be clear that a repayment plan post-termination will apply.
  3. Wherever possible, ensure such arrangements are confidential and the details are not to be shared with work colleagues.

If the employer is inclined to support employees financially, don’t mention this in employee handbooks because it will just open the floodgates and also ensure that any arrangements are entirely at the Company’s discretion and that it doesn’t set a precedent.

The whole issue of loaning money to employees is a matter for each individual employer and there is no right or wrong answer. However, experience says that if you’re going to do it, keep the financial amount to a minimum, only do it in exceptional circumstances, keep it confidential as far as practicable and have very clear repayment arrangements in place that also cover termination of employment by whatever means.

If in doubt, say “no”.

Adrian Berwick offers HR support to SMEs and GP Surgeries and if you want any advice or guidance on the issues raised in this article, please either contact me on 07885 714771 or adrian@abhrsolutions.co.uk