One of the philosophical decisions every employer will be faced with is whether to provide employee loans. Sooner or later, a financially stressed employee will ask the boss for a short-term loan to carry him or her to the next paycheck. From this limited scenario, the options become wide and varied – up to long-term loans for downpayments on home purchases.
For most employers, these decisions aren’t easy. Simple compassion will allow most of us to relate to an employee’s position. Sometimes money gets tight, and our options seem limited or even unavailable. We’ve all been there.
Furthermore, our employee works hard every day to make our organization more successful. How can we not help out?
Quite simply, the employer-employee relationship is complex enough to not add further complication by layering on a debtor-creditor aspect.
Risks
Among the direct risks are –-
Not getting paid back. Yes, you may deduct the loan balance from an employee’s final paycheck, provided it doesn’t reduce the employee’s final pay below minimum wage. That would be a direct violation of the Fair Labor Standards Act.
Discrimination claims. What if you give one employee a loan but refuse it to another? Maybe you approve of one’s need but not the others. Or maybe you think one employee is “stable” but the other isn’t. Either way, you’d better be prepared to defend your actions with nondiscriminatory reasons, and the burden of proof will likely be on you.
It’s habit-forming. Once you begin making employee loans, they’ll become a way of life for your organization and your employees.
Tracking. While it doesn’t seem complicated, tracking employee loan repayments is often overlooked and error-prone. It’s not uncommon for employers to write-off uncollected employee loans.
Benefits
An employer may see retention benefits in a decision to provide employee loans, both short-term and long-term. The benefits may include increased employee loyalty and the removal of the distraction of financial stress. There’s merit to each of these arguments. Ultimately, my opposing views aren’t colored by particularly bad experiences – only complicated ones.
Alternatives
Beyond the complications of becoming your employee’s creditor, there’s a larger concern of enabling poor financial management. Will a loan fill the void or only delay the inevitable financial day of reckoning? Perhaps the greatest value you, as an employer, can provide your employee is sincere empathy and financial guidance. Be a good listener and offer your advice on borrowing from banks, mortgage lenders, relatives, and subprime sources of credit. More importantly, offer advice on budgeting and community resources that can help with money management.
If you’re convinced you want to provide employee loans, make sure –
- you have a written policy
- you get a signed promissory note
- you’re consistent in your practices.
For me, the best advice is, unless your business is banking, stay out of the banking business.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFOs specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.