What Employers Need to Know About Payroll Advances

What Employers Need to Know About Payroll Advances

Pay Day AdvanceRecently a client told me his employee asked for a payroll advance, and my client wondered if that was a good idea for him to do.

It’s not uncommon with our struggling economy to hear that even some working folks get a bit over their heads financially. 

There are some important things to consider if you are inclined to give an employee an advance or even a loan.

You need a written payroll advance policy:

Start with a solid written policy so you don’t have to decide for each and every request if it’s something your company will do.  This will give your employees some advance notice of what to expect when or if they ask.

You should consider setting some parameters 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 (i.e. not currently under any disciplinary actions).

Remember that you must apply this policy in a non-discriminatory fashion across the board, just as you would do with any other company benefit.

Decide how often employees can have advances:

Another consideration is how often an employee can have an advance.

My experience is that oftentimes, taking an advance can be harmful for the employee, as their next paycheck is going to be short, and they need another advance to keep their heads above water. Pretty soon they’ve dug themselves into a hole they can’t crawl out of.

If employees can only take an advance once a year, for example, they will be forced to continue to manage their finances.

Always create a written agreement with an employee who gets an advance:

Written agreements ensures that everyone has the same understanding about what will happen.

Typically an advance is 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.

Deductions and payroll advances:

Be sure you account for taxes and anything else, such as insurance premiums, when you calculate the advance amount.

There are a few payroll deductions that can be made that reduce an employee’s pay below minimum wage and loans and payroll advances are included in that list.  The only requirement is that the employee and the employer agree in advance and in writing.

The interest charged, or any fees you impose for additional record-keeping, cannot drop their pay below minimum wage per federal law.

Be careful with charging interest on payroll advances:

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.

The laws do state 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.

It’s better to know too little than too much:

When an employee asks for loans or advances they will most likely offer you some explanation why they need the money.  Be careful during this conversation to not pry too deeply into their personal affairs.  You don’t want a charge of discrimination coming your way later on!