“In God we trust. All others pay cash.”
Companies: Want to avoid throwing your money away? Then don’t lend your employees any.
Unfortunately, people get into “money troubles” from time to time. For some, unexpected medical bills or car repairs cause a temporary “cash flow” problem. But for others, constant overspending leads to a permanent state of financial crisis.
Regardless of the cause, employees facing a pinch sometimes ask their employer for a loan or an “advance” on their wages. The request often falls to the Human Resources (“HR”) Manager. The HR Manager likes the employee and wants to help out.
So, despite not being a bank, or asking for collateral, or charging any interest (which state laws usually prohibit employers from doing anyway), the HR Manager approves the loan/advance. The parties sign a simple re-payment agreement after the employee swears on his (not yet dead) mother’s grave to repay the loan in full. And sometimes the employee does pay the loan back in full.
But other times the promise goes unfulfilled. As an old proverb cautions: “A hundred wagon loads of thoughts will not pay a single ounce of debt.” Oftentimes the wagon hits a series of potholes, forcing the company to confront a number of difficult scenarios:
Pothole #1: The employee asks for a second loan before the first is even paid off. Do you double down? Do you really know what the loan is for? Or are you just enabling additional self-destructive behavior?
Pothole #2: The employee asks to restructure the loan’s re-payment terms. Do you extend the payoff date, or reduce the amount of the installment payments? If you do, you may just be delaying the inevitable default on the loan.
Pothole #3: Word gets around and soon several employees are asking for loans/advances. Some of these folks are marginal to poor performers, without a long-term future at your company. Do you have to extend them the same loan terms? And if you don’t, will they allege discrimination?
Pothole #4: The original employee quits or gets fired. A sizable portion of the loan/advance is still owing even after the company offsets as much as it can against the employee’s last paycheck.
Now what? Do you cut your losses? Or do you send a “demand letter” asking the ex-employee to repay the debt? And if the ex-employee ignores the letter, do you file a lawsuit in small claims court against a (likely) insolvent individual?
Let’s say you sue the ex-employee. As we know, ”the best defense is a good offense.” Are you prepared to deal with a counterclaim from the ex-employee asserting a violation of some employment law (i.e. discrimination, harassment, retaliation)? Are you able to handle the risk of the company owing the ex-employee money?
In short, providing a loan to an employee often results in myriad administrative and personnel headaches, capped off by a “good deed getting punished.” To avoid this, politely deny the loan request and advise the employee to go to a financial institution.© MICHAEL BEST & FRIEDRICH LLP