Ask HR: Payroll Advance vs. Employee Loan


Dear HR,

I have several employees that always seem to be short of funds a week before payday and have asked me for a payroll advance. Also, I recently had a long-time employee ask for a loan – with the idea that he can make monthly payments back to me by having my bookkeeper deduct a monthly pay back payment. What are the rules for draws and employee loans?  Are there any issues I might not know about?

 

HR Answer:

Ahh, payroll advances! Sometimes emergencies happen and employees need money immediately. When an employee asks for a loan or an advance, they will probably offer you some explanation as to why they need the money.  Be careful during this conversation—try not to pry too deeply into their personal affairs.  You don’t want a charge of discrimination coming your way later on!

Payroll Advance vs. Loan: First, there is a big difference between a payroll advance, often called “a draw,” and a loan.  Typically a draw or advance can be given for work that has already been done and is not more than the net amount for the next paycheck.  The advance is paid back through a payroll deduction.

 

Start with a written, company payroll advance policy that is communicated clearly to all employees:

If you want to allow employees the option of a payroll advance, you will want to start with a written company policy so you don’t have to make any special decisions for each and every request.  This will give your employees clarity on what to expect when they ask.  You may also set parameters by defining who is eligible.  For instance, you might limit it to employees who have been with you for a certain amount of time and who are in good standing with the company (e.g. not currently under any disciplinary actions).  Remember that you must apply this policy in a non-discriminatory fashion to all employees, just as you would do with any other company benefit.

 

Decide how often employees can have advances: The downside to payroll advances for employees is that they can get caught in a negative financial loop as their next paycheck is going to be short, and they may need another advance to keep their heads above water.  Pretty soon they’ve dug themselves into a hole they can’t crawl out of.  Many businesses have policies that allow employees only one advance per year.

 

Always have a written agreement with an employee who gets an advance: Keep a written agreement form handy for the employee to sign.  Written agreements ensure that everyone has the same understanding about what will happen with the money and their paycheck.

 

Be careful with charging on an employee loan: If you decide to loan money to an employee versus a payroll advance, you are allowed to charge them interest on the loan, as long as it is a reasonable amount.  Oregon law states that the employer cannot profit from the transaction, however … so be careful about how much interest you charge.  You also must be mindful that if an employee quits or is discharged you will have to make arrangements to get paid back, and that may prove difficult for you to enforce.

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